Regrets, I’ve had a few

Perhaps, like Frank, you’ve had too few regrets to mention. But unfortunately, when it comes to investing, I’ve had plenty.

About what I invested in, and what I didn’t. About when I bought, and when I sold.

Unfortunately, it seems those regrets, and my fear of future regrets, can play havoc with my investment decisions. According to Daniel Kahneman in Thinking, Fast and Slow:

Investors are prone to regret, and the anticipation of regret shapes much of their behavior.

And from Hersh Shefrin in Beyond Greed and Fear:

Regret aversion – the tendency to avoid decisions that could lead to regret – often leads investors to make poor choices.

How then am I to take reasonable decisions with my investments?

Am I just a rabbit frozen in the headlights of my future regrets? Or are there some practical steps that will help me sleep at night?

Minimise regret

It’s comforting to know that Harry Markowitz, the Nobel-prize-winning economist who developed Modern Portfolio Theory, suffers from the same challenge.

Markowitz once said in an interview:

“I should have computed the historical co-variances of the asset classes and drawn an efficient frontier. Instead I visualized my grief if the stock market went way up and I wasn’t in it – or if it went way down and I was completely in it. My intention was to minimise my future regret. So I split my contributions 50/50 between bonds and equities.”

Perhaps the best way to minimise future regret is simply to make fewer decisions.

Decisions, decisions

A good reason to avoid investing in active funds (aside from the fact that they will on average underperform an index tracker) is the number of decisions it requires.

Possible future regrets are manifold. Did I choose the right market? The right investment style? The right manager?

And if I start to regret any of those decisions then I’m facing a timing problem. Do I cut my losses now or do I hold on in hope of a turnaround?

According to Michael Pompian in Behavioral Finance and Wealth Management, the odds of me making the right call are not good:

The fear of regret keeps investors from buying when prices are low and from selling when prices are high.

Conversely, investing in a global tracker requires just one decision: to invest in equities. There’s a lot less to stress over. A lot less to regret.

The key is simplicity.

Keep it simple

I greatly admire the analysis by The Accumulator on the Slow and Steady and No Cat Food portfolios. I’m sure they would lead to good outcomes.

The question is, can I be trusted to manage that many separate elements?

I fear not.

My penchant for analysis means I will be tempted to revisit the asset split every time I rebalance. That temptation will inevitably lead to bad decisions.

As Oscar Wilde’s Lord Darlington observed: “I can resist everything except temptation.”

Sticking to just two or three funds – or even a single multi-asset fund – means I have fewer temptations to fiddle.

Fewer moving parts in a portfolio means fewer decisions to make.

Avoid extremes

It’s harder to think about future regrets when markets are high and rising, and too easy to get caught up in maximising my imagined future returns.

But investing 100% in equities, or bonds, or bitcoin, leaves me susceptible to regrets when, at some point, the market inevitably moves against me. A more moderate strategy allows me to remain sanguine about such moves.

As Morgan Housel suggests in The Psychology of Money:

Avoid the extreme ends of financial decisions. Everyone’s goals and desires will change over time, and the more extreme your past decisions were the more you may regret them as you evolve.

It’s not about removing all risk. Just think through the possible outcomes and how you’d feel about each.

Good enough

The bulk of my portfolio is dominated by global trackers, Vanguard LifeStrategy, short-term gilts, and cash.

It’s not perfect. I’m not sure it’s even logical. I have too much cash, my fees could be marginally lower, and I would likely have better returns with more equity.

But, for me, it’s more important to avoid regret and stick to a reasonable plan than to have a perfect portfolio.

So it may not be the best option but it’s almost certainly good enough. As Charlie Munger told us, good enough is just fine:

It’s remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be very intelligent.

Change your mind

However much I try to simplify things, there are inevitably going to be times when I change my mind.

And that’s okay. Mistakes happen and things change. Even good decisions can produce bad outcomes. Don’t sweat it. Morgan Housel again:

Embracing the idea that financial goals made when you were a different person should be abandoned without mercy versus put on life support and dragged on can be a good strategy to minimise future regret.

Break some rules

Notwithstanding all the wise quotes above, I frequently allow myself to break all the rules.

If I want to experiment with private equity, or I have a hunch that infrastructure is going to be a winner this year, then why not have a punt? I can make some mistakes and learn some lessons.

Provided I don’t invest enough for serious regrets to kick in then no harm done. It may even help me leave the main part of my portfolio alone.

The final curtain

Maybe you’re completely logical – the T-1000 of investing. Maybe you can calculate the most efficient portfolio and mechanically rebalance every year according to your finely tuned allocation until the Grim Reaper is at your door.

But personally – and I suspect along with many people – my anxiety over future regret means I don’t always make the best investment decisions.

What’s more, I’m not actually expecting this to improve. In my early investing journey, mistakes were relatively easy to accept with a shrug. But as I begin to rely more on my investments for income, the levels of regret anxiety rise further. There’s less opportunity to put things right.

The behavioural psychology books may exhort me to overcome my investing weaknesses, but that’s easier said than done. In the real world, the best I can do is try to avoid them by minimising future regret.

Non, je ne regrette rien (nearly…)

I may never reach full investing Edith Piaf. But to summarise I find it helps to:

• Take fewer decisions
• Avoid extremes
• Keep it simple
• Aim for good enough, not perfection

I often return to that earlier quote from Harry Markowitz. The fact that someone so steeped in investment analysis could take such a simple and broad-brush approach speaks volumes. It gives me hope that maybe I’ll do okay after all.

Investing will always involve uncertainty. But if I can make peace with a few inevitable regrets, my finances stand a better chance of being good enough.

I guess the sign-off should be something about doing it My Way, but I can’t quite bring myself to write it.

So I’ll just say, may your decisions be few – and your regrets fewer still.