Is the fear of regret damaging your portfolio?
Here's a tale of two investors and two companies. Our first investor holds shares in Company A and considers selling them to purchase shares in Company B. Let's say Company B is Boohoo.Com(LSE: BOO). For whatever reason, this never happens and yet, a year later company B's shares have trebled in value (which they actually have).
Our second investor holds shares in Company B but sells them to buy shares in Company A. As above, a year later and Boohoo's shares have soared 300%. While both investors are unlikely to be happy, which do you think feels worse?
Most people would point to our second investor. But why?
Why regret hurts
Losing money feels worse than not making money. If we had to choose, the vast majority of us would prefer to be the first investor and yet the only difference between the two is that one did nothing (which tends to be the attitude of most towards their personal finances) and the other acted. In both situations, the 'loss' was equal. The conclusion: do what everyone does and you'll experience less regret.
The fear of regret is normal but irrational. It explains why we act more conservatively than we should. It's why we hang on to possessions despite never using them for years -- the remorse we may experience if they're eventually needed is too great to contemplate. It also explains why some people, despite having long investing careers ahead, only consider 'safe' FTSE100 companies for their portfolios. Truth be told, these investors may be better off buying a cheap index tracker or ETF that tracks the market if their fear of regret is particularly strong.
Beware 'last chances'
There are drawbacks to being passive, though. Imagine you've found the perfect company. The balance sheet looks solid. Revenue and profits are rising. The product/service offered by the business looks unbeatable. For whatever reason however, you fail to buy the shares. Suddenly, they're up 10%. The next day, another 10%. You start thinking: "This might be my last chance to buy the shares before they truly rocket. If I wait, I'll miss out on MASSIVE profits."
This, of course, is no different from booking tickets to see your probably soon-to-be-retired favourite band. They won't be around much longer and neither will the shares at this price.
So you do it. Here, the fear of regret is magnified by a 'last chance' offer: a situation in which something becomes more desirable because time is (apparently) running out to buy/experience it. More often than not, the share price falls back in the next few days as traders take profits and interest dies down. Your desire not to miss the boat has led you to pay more than you originally intended. You could still do very well but, ironically, only time will tell.
To counter the fear of regret, we need to understand that while some boats never return, many do. Share prices never rise vertically and any pullback may represent another opportunity if the investment case hasn't changed. Moreover, there will always be other boats waiting to set sail. Let's agree to focus less on what we should have done and more on finding companies whose future prospects appear so bright that they mitigate any perceived risk from purchasing the shares.
One other thing you should do
Learning the identity of your greatest adversary is one of biggest challenges in investing. It's not other private investors, day traders or the big institutions. Rather, it's likely to be the very person staring back at you in the mirror.
Our desire to avoid regret is understandable but potentially very damaging for our finances. If you're keen to avoid making expensive errors in your investing career, I strongly suggest you read a special report produced by the experts at the Motley Fool.The worst mistakes investors make contains some excellent hints and tips on how you can avoid the most common blunders.
Best bit? The report is completely free. No possibility of experiencing regret here. Click here for your copy.
Paul Summers owns shares in boohoo.com. The Motley Fool UK has recommended boohoo.com. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.