When my mother died a few months ago, her portfolio included many individual stocks that she had bought half a century ago. What she originally paid for these stocks back in the 1950's and 1960's was only a tiny fraction of their worth in recent years. She could not sell them and buy other stocks that were performing better, due to the capital gains taxes that she would have had to pay. So, she was essentially "locked in" to these stocks while she was still alive.
Now that is bad enough, but what if these had been mutual funds instead of individual stocks? She not only would have got "locked into" the investment, but with a mutual fund you also get the fund manager and fees, and you would be locked into those and whatever changes may occur in these aspects, too.
Is this a non-issue? It's kind of hair-raising, thinking that in my old age I might be "locked in" to a fund manager that hasn't even been born yet, not to mention whatever fees he might dream up.
Apparently nobody but me thinks this is a problem or is concerned about this sort of thing, though it apparently affects a lot of elderly people. I know my mother's income from her portfolio was pretty small, and certainly at some point one's life expectancy is short enough to make selling, and just swallowing capital gains tax on virtually the entire proceeds from the sale, a losing proposition for the elderly while they are alive.
Hey, c'mon, W2R, some of us need a couple days to catch up on the threads. Perhaps the nature of the responses may reflect the age of the respondent.
I've begun to think that investor psychology boils down to admitting to ourselves that we're going to do stupid things with our money, and the question at hand is only the degree of stupidity. Once one arrives at that admission then there's no worry about looking stupid by selling an investment and paying taxes-- only an admission that one has delayed admitting one's stupidity before now or that one was stupid for selling too soon. My "stupid stock" is Berkshire Hathaway.
Investor psychology has nothing to do with logic, either, especially if other elder concerns rise above it. When spouse's grandfather was near death, he adamantly insisted (to the point of cardiac care) that his daughter (spouse's mother) sell his savings bonds. We're talking the old-school Es & Hs in the 1990s, some of which had stopped paying interest years ago and were more valuable to the Smithsonian than to the investor or the U.S. Treasury. There were literally shopping bags full of paper which required a couple of days (and a dedicated bank teller) to process. Of course the taxes were humongous and could have been avoided by an inheritance basis step-up, something my MIL regrets to this day. (She says that she would have made a lot of money by lying to him.) Her father's point was that he didn't want to "be a burden" by having to use estate lawyers and probate to get the money to her, which was just as irrational as holding onto dead bonds. He'd rather screw a lawyer out of a few hundred in fees, even if he had to pay 10x that amount in taxes.
So maybe your mother's version of investor psychology has nothing to do with the stock's relatively recent performance. Maybe she felt that she'd never find another stock with a record approaching the stocks she already held. Maybe, like some of my relatives, she'd rather lose body parts than pay "those bahstahds at the IRS" their due-- even if a taxed profit is better than a tax-deductible loss. Maybe the money has just grown too big to wrap their brain around-- my FIL will regale his granddaughter for hours about 1940s prices but choke at having to pay $2 to a parking meter even if it means driving around for 30 minutes or risking a $30 ticket. Maybe she hesitated to break into the principal for living expenses despite her reduced remaining life expectancy, or she wanted to pass on a gargantuan inheritance-- even if both approaches led to deprivation instead of frugal living.
IMO two things can help work through the [-]stupidity[/-] psychology. The first is a well-crafted quantitatively-oriented "investment policy statement" that allows for changes to an asset allocation. If an investor has put a lot of work into an IPS (for example, as much work as they put into picking those stocks) then they're willing to assess their portfolio against the IPS and make the changes. If the IPS says "stocks that have above-market 10-year-records" or "funds with expenses less than 1%" then people become anchored in the effort they put into the IPS. When the portfolio no longer meets those criteria, it's time to either bite the tax bullet and follow the IPS, or it's time to rewrite the IPS. Most would choose to do the former.
BTW, for those guys who've written "I'm dead" letters to their spouses telling them how to run the portfolio-- that's an IPS too.
A second technique is to look at all the money-- not just the tax paid but the money saved by avoiding future expenses. Spouse and I liquidated Tweedy, Browne Global Value last year by selling shares that we'd held over a decade and had more than doubled in value. It hurts to pay those IRS bahstahds a tax amount that will be bigger than some of my old W-2s, or by paying all the commissions to buy into an equivalent ETF. However we've made it up in less than a year just by not paying Tweedy's expense ratio, and we've liquidated during what's likely to be among history's lowest long-term cap gain rates. I also don't have to feel critical of Tweedy's management anymore. Were we stupid? Could be, especially if Tweedy outperforms. But OTOH they're re-opening Global Value next week and they're still charging a 1.38% ER-- doesn't seem very fiduciary (let alone customer-friendly) to me.
Maybe neither of those would've helped your mother, especially if she didn't have an IPS and didn't record how much she paid in brokerage commissions or how much she could make in other investments. Maybe these techniques could be of use to us in 20-30 years, but only if we think in those terms today. What helped with my FIL, though, was pointing out that a $2 parking fee today was worth about 15 cents in 1940. At that point my MIL would clench her jaw, telling him to stop being silly and just park the damn car. So maybe the "reduce it all to dollars" technique has to also adjust your mother's dollars to their 1950s-60s equivalent when those stocks were purchased. It might mean more to someone like my FIL who thinks bread is overpriced at $1 or remembers when movies cost a nickel.
BTW, how bad were your mother's stocks? Were they like GE & Phillip Morris/Altria, which have greatly outperformed the Dow over the last four decades, or were they really so bad? The reason I ask the question is because long-term sucky stocks tend to get bought out or bankrupted, a survivor bias which eliminates subpar performance. Meanwhile stocks with great multi-decade records (which is why they have multi-decade records!) are called "bad" just because they've lagged for five or even ten years.
At least one investor on this board has shares of a stock that return more in ANNUAL dividends than his cost basis, yet a couple years ago that stock was declared dead just because its margins were no longer above 40% and its competitor was making inroads. AT&T & Microsoft have been bad-mouthed for their five-year performance, but anyone owning shares before AT&T's 1984 breakup or even MSTF's 1995 financial report would be a multi-gazillionaire today. Same for Apple in 1993, Pfizer from about the same era-- I could go on for hours.
She could be certain of paying cap gains if she sold, but she couldn't be certain that the new stocks would outperform. So maybe it was just a question of not wanting to deal with the degree of stupidity.
Enough philosophizing. Next week spouse and I are selling a chunk of Berkshire Hathaway...