Fix your money mistakes: Stuck in the past

May 19, 2011: 3:44 PM ET

(Money Magazine) -- Remember what your home was worth in 2005? Wipe that number from your memory. When you let an old value -- of a stock or a fund or your house -- get in the way of a smart financial decision, what might seem like harmless nostalgia can become a costly mistake.

Investors have long suffered from this problem, refusing to sell underperforming stocks and funds in the hopes that the price will bounce back. Today home sellers are the ones having trouble letting go of the past.

"Everyone is having a hard time coming to grips with what their home is worth," says Katie Curnutte, a spokesperson for the real estate information and listing site Zillow.com. Recent buyers are especially bullish on prices. "It's as if they thought they were too smart to wait until after the peak."

Shomari Hearn, a Fort Lauderdale adviser with Palisades Hudson Asset Management, says that even sellers who are sitting on lofty gains make this mistake.

One client who paid $500,000 for a home that would now sell for $800,000 is still holding out for a higher price because before the bubble burst similar homes sold for $1.2 million. "That was just a paper gain, and it is no longer realistic," says Hearn, "but it's so hard for people to focus on what is real today." 'My biggest money mistake'

How it costs you:

A too-high list price may doom you to a long and expensive wait. At the peak of the boom in 2005, homes stayed on the market for four weeks on average, according to the National Association of Realtors.

Now the average wait is eight weeks. In the past year about a quarter of sellers started too high and eventually had to drop the price, according to real estate site Trulia.com.

In a soft market chances are good that if you wait weeks to make a price cut -- and are stingy about it -- you'll have to cut again.

While your home sits unsold, you're still paying your mortgage, homeowners insurance, utility bills, the landscaper, and so on.

Ross Levin walks his clients through this exercise: He calculates annual carrying costs at 3% of the home's value and adds another 5% to cover not having that money available for something else.

Asks Levin: "Do you really think you will get 8% a year in appreciation to make up for the cost of holding on?" Similarly, every day you can't part with a washed-up stock or fund, you could be doing better elsewhere.

Why you do it:

You're anchored: When you take stock of an investment, you have a tough time shaking off the price you paid for it -- or the price you once heard it was worth -- and believing in the current market value. The higher number is a hard-to-resist reference point. Behavioral economists refer to this bad habit as "anchoring."

You like to get back to even: When you hold on to losers in the hope of returning to your anchor price, another behavioral quirk comes into play: You want to emerge a winner. The fancy name for what ails you is the "disposition effect."

How to fix it:

Calculate the cost of clinging: Ask yourself what you're paying to hold on to this investment and what the costs are of missing out on other opportunities. Will this house, stock, or mutual fund beat that total? If not, cut your losses quickly, which in the case of real estate means setting a realistic asking price.

Pretend you're buying: "Whether it's a home or a stock, the key question to ask yourself is, 'If I were a buyer today, what's the price I'd pay?' " says Justin Fulton, a financial adviser at Signature Wealth Management in Norfork, Va. "That helps you focus on the current value, not what you wish something was worth." Have a money question? Ask The Help Desk To top of page

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