Fear of Regret - How Does it Affect You & How To Avoid it
Fear of Regret
In this article we cover the investor emotion known as 'Fear of Regret'. Fear of regret can lead investors into making poor investment decisions.
Have you ever made an investment, only for the price (of a stock, bond, crypto, etc.) to drop and then you suddenly catch yourself unwilling to sell lower than your initial buy-in price? If that's the case then you might have suffered from Fear of Regret. Keep reading to learn more about it and how to avoid it during your future investments.
Recommended Read:
What is Fear of Regret?
Fear of Regret is based on the 'Regret Theory', which refers to the human psychology of anticipating regret if they were to make the wrong choice or take the wrong decision. Hence the psychological effect can impact your behavior and result in irrational decisions while investing. People hate admitting their mistakes and sadly this is one of the main drivers of Fear of Regret.
 |
| 'Fear of Regret' can really harm your investments |
How Does it Affect the Investor?
The effect from Fear or Regret works in two different ways. It can both cause you to be too cautious or risk-averse, as well as preventing you from cutting its losses and moving on to better investments. In some cases it can even motivate you to take too high risks. The investor needs to be aware of their emotions and it's affect on their behavior to avoid it.
Regret Theory in a Bear Market
In a downturning market i.e. bear market, the fear of regret might cause you to be holding onto an unprofitable investment.
For example, you might have bought TSLA shares at $403. Only six months later the value is less than $200, car sales are down 50% and Elon is still making cringe tweets. At this point, afraid of cutting your losses, you're stuck holding the bag due to fear of regretting your bad investment if you actually sell. However, this is the wrong way to look at it.
What you should really be asking yourself at the moments is "Would I invested in this stock again if I wasn't already invested?". If your answer is "yes", then great, keep investing. However, if you answer "no", then this will lead to you both regretting making a poor investment plus regretting not selling it when they realized it was as much.
Recommended Read:
Regret Theory in a Bull Market
In an upturning market i.e. bull market, the fear of regret might lead you to taking risks you really shouldn't be taking. A very common emotion that might strike the investor in a bull market is fear-of-missing-out (abbreviated FOMO).
Say you've been looking to invest in a given company for a while but haven't pulled the trigger yet. All of a sudden good news comes out and stock increases by 30% in a day. You don't want to miss out on further gains, optimism is high, so you buy in the same day. The next day the stock plummets 10% because of common volatility. Well, you just lost money because due to fear of regret. In bull markets such behavior en masse can even lead to irrational exuberance and later subsequent market crashes.
 | |
|
How To Avoid Fear of Regret when Investing
There are a couple different ways to avoid Fear of Regret. The most important step is to be aware of it's existence and how it might be affecting while investing. You have already made some progress in this regards while reading this Investors Psychology article.
Regret can affect us differently, and investors who are more neurotic tend to experience regret more than others. Ask yourself twice before making an investment decision if you're really acting on logic and rational - or if there is an desire or emotion inside of your that you're trying to cater to.
Automating your investments is another great way to avoiding the influence of emotions. Set up your investments to dollar-cost-average (DCA, i.e. buying the same amount at the same time every week or month) or use an AI driven robot advisors to do the job for you.
Another approach is using formula investing, where you rigidly follow a certain prescribed set of rules for your investment strategy, which you never sway away from.
Now you're away of how Fear of Regret affects the investors psychology. This means you're now able to account for it when investing and if necessary take aforementioned precautions in order to avoid it.
