Educational Spotlight: Regret

“Make the most of your regrets; never smother your sorrow but tend and cherish it till it comes to have a separate and integral interest. To regret deeply is to live afresh.”

Henry David Thoreau

Part of being human is making mistakes and then living with the memory, and sometimes the consequences, of those mistakes. Some mistakes are mistakes of omission. We squandered our time or wasted our opportunities. Some are mistakes of commission. We made a bad decision and hurt or embarrassed ourselves or someone else. Any of these can cause regret.

Regret is natural and can be healthy to a point, but it can also rob us of our joy, keep us stuck in the past, and leave us unable to live in the moment or prepare for the future. Sources of regret can generally be categorized into two groups. First, we may regret bad choices we made. A moral lapse, an unkind word, an overreaction, or a thoughtless deed or comment can generate regret. Second, we may regret decisions that did not turn out the way we hoped. We may have made the best choice we could with the information we had at the time, but inevitably, through lack of knowledge or simple probability, some choices will fail to deliver the results we expected. These two sources of regret should be handled differently.

When we make bad choices, experiencing regret can be very healthy because it gives us the opportunity to learn and improve. Ignoring our mistakes in the interest of “moving on” can be hurtful to others and robs us of the chance to grow. Remorse is appropriate, but it is not the end. We should ask, what can I do now? If I hurt someone, I can apologize and take steps to repair the damage I caused. If my mistake hurt only myself, I can reverse course. If I made a foolish investment decision, I can cut my losses and exit the investment. Then I can learn from my mistake and make plans to do better.

In our relationships with others, we can ask what triggers prompt us to be insensitive or hurtful, and how we might avoid them or at least become more aware of them. In regard to finances, we can try to understand what drew us into a bad decision. We may overspend or be drawn to get rich quick schemes or flashy sales pitches. When we recognize these tendencies in ourselves, we can take steps to protect ourselves. Sometimes people discover investments they do not fully understand but that promise exciting upside. These can lure investors who would be better served by a prudent plan rather than one off opportunities. We can remind ourselves of our plan and how deviating from it is not in our best interest.

In my early days of investing, long before I was a professional or even knew what I was doing, I tried day trading. Unfortunately, my first few trades were wildly successful. It was the final months of the tech bubble. I thought I was brilliant and made larger trades, quickly losing what was, at the time, a significant portion of my net worth. I decided to treat the financial setback as tuition for learning about investing.

Forgiveness is also important. We should seek forgiveness when we have harmed others, and we should be willing to forgive ourselves for our own mistakes. Everyone makes mistakes, but those mistakes do not need to define us.

The second category of regret involves decisions that did not reflect poor judgment but simply did not pan out as expected. While some things in life work mechanically, many do not. When I start my car, the engine will ignite, and when I put the car in gear and press the accelerator, I will move forward. But I have no guarantee that the route to work I usually take will be the fastest way today. Being delayed by an accident does not mean I made a poor choice. Much of life works this way. We do what has the best probability of a favorable outcome but must accept that this particular time may yield a different result.

This is often the case in investing. The result may look obvious in retrospect, but this is an illusion. Nobody knows the future. The best we can do is make sensible decisions with the information we have and then accept whatever happens. It is easy to judge a decision by its outcome. If I buy a stock and it goes up, I must have been smart. If it goes down, I must have messed up. We play armchair quarterback and feel vindicated when our call works or a contrary call fails. This is a logical fallacy.

A good decision may succeed only 55 percent of the time, or even 10 percent of the time if the successes are much larger than the failures. The only way to know in retrospect whether a decision was good would be to make the exact same decision many times, which is not possible for most choices in life. Rather than beating ourselves up over results, we should examine the process. If our reasoning was sound and our actions made sense given the information we had, there is nothing to feel bad about, even if things did not turn out well. If not, we can learn how to improve our decision making in the future.

Obsessing over past mistakes, near misses, or catastrophic failures only saps our confidence and ruins our mood. Instead, we should focus on what is within our locus of control. Every day is a new opportunity to make good choices. Importantly, we also need to recognize that we are not ultimately in control. This may seem frightening, but it is actually freeing. Those of us who believe in God can take comfort in knowing that He is able to redeem our mistakes and restore what was lost. The Bible says, “I will repay you for the years the locusts have eaten” (Joel 2:25, NIV), and “We know that for those who love God all things work together for good” (Romans 8:28, ESV).

What does this have to do with financial planning and investing? Everything. Making poor financial decisions is generally much easier than making wise ones. Even smart decisions can sometimes lead to disappointing results. It is easy to be haunted by regret and to lament how far behind we feel. Examining the past is useful if it helps us learn and improve, but being paralyzed by regret serves no purpose.

Making specific investment decisions is especially likely to provoke regret. I am often asked about one off investment ideas, but this can be a trap. At best, I can determine whether an idea is slightly more likely to outperform the market than to underperform. Either choice can lead to regret. If we invest and lose money, we regret the loss. If we do not invest and the opportunity performs well, we regret missing it. I remember a time as an analyst when I recommended a stock that surged, but the portfolio manager was upset that we did not take a larger position, which was my fault for not being convincing enough.

In investing, it is prudent to consider regret in advance. Think through the possible outcomes and seek to minimize regret. This may mean reminding ourselves that investing is a probabilistic endeavor. Over time, and across many decisions, results should converge toward the quality of the process. But for any individual decision, a poor outcome is always possible, especially over short periods. Individual choices may not live up to our expectations, so we should ensure that we can accept those outcomes without emotional damage.

In conclusion, mistakes are an unavoidable part of life. Regret can be healthy if it motivates us to correct our errors and to learn and improve. Considering potential regret before making a decision can lead to better decisions and less regret. While acknowledging the past and owning our mistakes is important, our focus should remain on what we can control right now. Finally, it is helpful to remember that we are not ultimately in control. The fate of the world, and even our own future, depends on more than us.