Investing in the stock market influences our emotions, and the way we feel, because of its constant volatility and unpredictability. While we are trying to make the best decisions, it is impossible always to be right or make the right calls constantly.
One of the most common emotions that riddles investors' minds and judgment is regret, and it can happen for several different reasons and have a strong impact on your decision-making.
In this article, we’ll analyze investing regret, how it works, and how to avoid letting it affect your investment process.
What is investing regret?
Investing regret is a feeling of regret that comes from making a wrong or sub-optimal investment decision, which affects future decisions. Investing regret doesn’t happen solely when you make a mistake or lose money. It can also happen even if you made money on the trade. This can either be because you bought a few shares of a stock that doubled, and you should have bought more, or because you didn’t sell a stock that ended up going down.
Investing is based on expectations and outcomes, and even a great investor can have certain expectations, but the outcome will be slightly different than the expectations. What is essential to understand is that you need to accept that the market outcomes will always be slightly different than your expectations.
An example is that you can’t possibly buy a stock at its lowest price because you never know if the stock will go lower or not. In the same way, you cannot sell a stock at its highest price because it is nearly impossible to guess what that price will be.
Investing regret types and examples
There are a few common types of situations that can lead to investing regret. Let's look at some of the most common:
- Losing trade
The most common, and perhaps the main reason why investors feel regret is when they lose money. You wish you had not made the trade or even start regretting the size of the trade altogether.
- Not making a trade
Another common type of investing regret is when you are considering placing a trade or buying or selling a stock, but you give up on the idea and just watch the price move in the direction you predicted. This is relatively common, and while you can learn from this type of situation, you should not put too much emphasis on it because it can lead to overtrading, chasing all the trades that could have been profitable.
- Wrong size
Investment sizing is a science, and it takes years to master. Therefore, it can also be another form of investing regret. For example, if you decide to buy a stock that goes up, you may feel like you should have bought more shares. In the same way, you can also feel regret if you buy too many shares of a stock that ends up plummeting.
Market timing is partly a science and luck, and as an investor or trader, you need to accept and embrace this. It will be impossible to get every timing right and make the correct decision with the perfect timing. Understand that as long as you’re making money, you are making the right decisions.
- Selling too soon
There isn’t a single investor that can predict exactly what a stock will do, especially in the short term. When you sell a stock too soon, or you close a trade that could have been more profitable, you should not beat yourself up because it’s nearly impossible to time everything perfectly. Additionally, it can make you hold on to future trades for a longer time, which might not be beneficial and can influence your decision-making process.
- Selling too late
Sometimes you hold on to a stock for way too long, and its price can decline suddenly. This is another common reason why investors may feel regret. In this situation, you have to analyze whether or not you made any mistake and what you could have done differently. Just like timing the market is nearly impossible, a stock’s movement is also completely unpredictable.
How to avoid investing regret
There are a few tips you can use to overcome and prevent investing regret from affecting your future investment decisions. Here are some of the main ones:
- You’ll never be right all the time
Nobody is right all the time, especially in the markets, and understanding and accepting this is one of the ways that you can overcome investing regret. You’ll always end up making one wrong decision here and there, and the best approach is to learn what kind of mistake you made and avoid it in the future. Do not let a few mistakes affect your future decisions and instead, use them to your advantage.
- Even the best investors lose money
If for some reason, you think it’s only you making mistakes, you need to understand that even the top-performing investors make mistakes. Investing requires not only you to be right fundamentally but also for the market to agree with you. For the price of an asset to move a certain way, the rest of the market participants need to agree with your vision, and sometimes you may be correct, but the market does not agree with you.
- Accept the unpredictability of the market
The market is completely unpredictable, and whether you want to accept it or not, it is nearly impossible to get the timing of a trade or investment always right. Accepting and embracing this unpredictability allows you to accept that you’ll make wrong or sub-optimal investment decisions from time to time due to this.
Accept that you are not always going to make the perfect decision, and as long as you keep making more correct decisions than incorrect ones, you will make money in the market.
As we explained, investing regret happens after an investment mistake or a sub-optimal investment decision you have made. This leads you to question your decision-making process and investment strategy and may lead you to take a different approach in your next investment decision.
Keep in mind that even when you make the right decision, you may end up losing money in the short term, and this is just due to volatility and market unpredictability.