Looking into causes for regretting investment decisions and how to avoid it.
During their career an investor (amateur or professional) will most likely gain experience with investor regret. Most investors will have made at least one decision which they regret, be it an investment they made or haven’t made or selling too soon. This article dives deeper into causes leading to investor regret and how to avoid it.
Many investment opportunities are sensationalized as now or never situations causing fear of missing out (FOMO). However it is important to understand whether this hype is warranted or if there are ulterior motives of market participants to push the particular investment.
For example someone promoting an investment might perform a pump-and-dump scheme. In such scheme they first hype the stock to increase its value. Then once the price reached its peak they sell leaving behind other investors with losses.
Investing into positions others are looking into or are discussing might also cause a sense of false safety. People also tend to exaggerate their successes which can lead to misguided investment choices. If such an investment succeeds it validates the investment however if it is failing it can lead to false conclusions since everyone lost money.
While there can be great inspiration found in those discussions it is important that an investor performs his own due diligence.
In hindsight many investment decisions seem logical and obvious which can result in regretting to not have invested at the right time. However an investor should always keep in mind that those investments seemed risky or illogical back when they were made. Making investments based on the fear of missing out when a price rises can lead to serious losses down the road.
“The stock market is a no-called-strike game. You don't have to swing at everything -- you can wait for your pitch.”
In the end it is impossible to know whether an investment will rise or fall in value. Stock prices tend to be highly dependent on whether the stock market is optimistic or pessimistic on a given day. Also outside influences such as news, politics or natural disasters can influence the price.
In addition past success don’t tend to indicate future returns. As a result investing into something after experiencing good returns might increase the risk of that investment. It will definitely increase the price of the investment compared to having it bought at a lower price.
The desire to not loose time or money which has already been invested can lead to sunk-cost fallacy. Often investors are avoiding to admit a bad decision to others and even themselves. As a result they put more time or money into a failed investment rather than to cut their losses.
In these cases changing their strategy and pulling the plug can seem like a admittance of failure which is being avoided by the investor. However an investor should always try to base decisions based on objective facts, such as the financial success of a investment. While admitting failure might hurt in the short-term it will provide better results long-term.
When investing it is important that the investor always understands the investment in question? As Warren Buffett says one should generally invest into simple businesses which are easy to understand. If a business or its financial documents seem complex it is often better to take a step back.
The individual risk tolerance and investment objectives should also play a big role in deciding on an investment. If someone plans to retire soon an highly speculative investment might bring the retirement into question.
Finally it is crucial to use reliable sources for investigating potential investment opportunities. Gut feeling cannot replace fundamental analysis of an investment. While other people’s opinions and research can be an inspiration it should not be the foundation of a good investment.
Generally the best investments are those which continue to be attractive long-term and not just for a short window of time. Purchasing an investment without any research, based on gut feeling, hype or fear of missing out should simply be considered gambling and not real investing.
“The most important quality for an investor is temperament, not intellect. You need a temperament that neither derives great pleasure from being with the crowd or against the crowd.”
However investors also shouldn’t beat themselves up for having made a bad decision. Instead they should admit it to themselves and cut their losses.
In the end it is important to understand that the investor itself is responsible for making an investment. As a result it is key to successful investing that an investor performs its own research before making an investing.
Learn more about fundamental investing concepts in this recommended post.