Question

Cody has invested $12,000 total. He has invested $3,000 in stocks, $2,000 in a certificate of deposit, and $5,000 in government bonds. Cody’s stocks are currently performing poorly. He has purchased $2,000 worth of an automotive company’s stock, and its value has steadily dropped over the last year. He is reluctant to sell the stock because he is worried about how much money he has already invested.

Which investment practice is Cody following?

Which investment shortcoming has he failed to avoid?

Which step should Cody take to improve his investment portfolio?

If Cody sold all his stocks and put the total amount in an account with 5% interest, in how many years would his money double?

Answer 1

1) Which investment practice is Cody following?
- He is diversifying across asset classes (stocks, a CD, and government bonds).

2) Which investment shortcoming has he failed to avoid?
- The sunk-cost fallacy (loss aversion / emotional attachment): he’s holding a losing stock because of how much he already invested instead of judging it on future prospects.

3) Which step should Cody take to improve his investment portfolio?
- Reassess his goals and target asset allocation, then rebalance. Sell the poorly performing stock if it no longer fits his strategy, cut losses when appropriate, and reinvest proceeds into diversified investments (e.g., broad index funds or bonds) consistent with his risk tolerance. Consider tax implications and transaction costs before selling.

4) If Cody sold all his stocks and put the total amount in an account with 5% interest, in how many years would his money double?
- Doubling time t = ln(2) / ln(1.05) ≈ 0.693147 / 0.048790 = about 14.2 years (Rule of 72 gives ≈ 72/5 = 14.4 years as a quick estimate).