Transforming Financial Regrets into Portfolio Gains: Five Strategies for Navigating Investment Emotions
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Walk in the money for the rest of us. This is a personal financial on money, how IT works, how to invest IT and how to live without worrying about IT. I'm your host, David stein.

Today is episode four sixty five is title transforming financial regrets into portfolio gains. Five strategies for navigating investment emotions on money for the rest was plus our premium membership community. We recently had a discussion on our member forms regarding regret.

The member wrote that he appreciated the time that we spend our money for the rest of us on figuring out how to Better manage our emotions as investors. This member said that regret he feels as one of his weaknesses he went. He regretted following his broker down the dot compete in the year two thousand, suffering a major loss, regrets not buying a rental property.

And instead of losing that money when the end t bubble blew up, many of us, what's money when the internet bubble blew up? The regret, though, that's ticula ly bugging this member currently, is that back in october, when he saw the thirty treasury bonds, the yields exceeded five percent for the first time, really since two thousand and seven. He saw a lot of bonds in his portfolio and invested in B, L, V.

The vanguard long term bond etf made about sixteen percent on that. But with bugging him is he also considered buying the vanguard extended duration treasure etf that has a longer duration interest rate sensitivity is returned over twenty percent in that time frame. And it's bugging him.

He felt that this opportunity was a fat pitch and that he didn't swing for a home run. In this case, we'll take a closer look at whether that was a fat picture, not but this just one example of regret. And i'll share some examples of regrets that that I have had in investing.

But in order to Better manage to regret, we first have to recognize that we are wired as humans to feel regret. IT can't be avoided. There are cognitive biases that we have that feeder regret.

Much of this is worked by Daniel conomo, amas diversity, Richard d. Diller, that studied behavior economics, behavior finance, decision theory, really identified many of these biases. Foremost is loss aversion.

We feel the pain of losses more than we feel pleasure from the equivalent gain. Losing one hundred thousand dollars feels way worse than getting or winning or earning a hundred thousand dollars feels great. A negative review of my book or the podcast feels way worse. I remember way more than I do a positive review by that token, when we miss out on a game. So a regret, in this case, of not investing in something versus having investing in something and lost money.

The feeling of not investing in something, and I went up that actually feels like losing IT can feel worse than the actual game if we did invest in something, such as the example of this member game made sixteen percent on the one investment, but he couldn't made over twenty percent. And knowing that, that discomfort feels worse than the pleasure from the sixteen percent king. So that's loss of version.

The other cognitive as we have is hindsight bias, feeling like the event what happened was predictable, that we should have known that we didn't know but didn't act. That's not true in most cases. It's really easy to connect the dots.

Going backwards makes IT seem like I was also predictable. But there are many pathways the future could have taken. It's just easy here to figure out which way that actually came because we're looking back.

So how do we manage regret to make Better decisions? But the first is we want to minimize our maximum regret, something we've discussed a number times in the show. We want to avoid ruin and including retirement ruin.

This comes from a framework by behavioral economist leered gene savage. IT was what he described as mini max regret, which is an an approach to decision making. The ideas is to minimize the worst case energy that we can avoid by taking preventive action.

The worst regret is the regret of doing something that completely ruined us to make an investment decision that was so egregious that we put IT on the line speculating with our retirement nesta's gue in one investment, the clipper you or something where we just can't recover from the phrase go big or go home has always bug, because IT doesn't take into account what are you gonna a do after you lost big and go back home and have nothing. We can go big. We have a reserve in a buffer in case things don't work out.

We need the ability to recover because we don't want these catastrophic outcomes to impact ourselves and our family. It's why, at my core, i'm incredibly risk averse. And you look at my portfolio, which I share on money for the rest of plus, i'm a conservative investor because I don't have time to recover from major market losses at this point in my life.

I want to minimize my maximum regret when IT comes to investing, but that doesn't mean that I still don't feel regret as we all do. So once we have taken actions, we have buffers, we purchase insurance, we don't take excessive risk. We perhaps take actions for a safety first retirement and an annuity or big decisions we make to make sure that we're not ruined financially by what happens.

Once we do that, then we have all these small regrets. That bug s the pro. I, even before I considered doing this episode, we were discussing this a few weeks ago.

In twenty twenty, we sold a midd century modern home that we thought was our forever home. It's in ho falls, beautiful house. Love being there, had really great memories, beautiful pizza of and in back.

Love her neighbors. But then we had bought a house in phoenix. So then we had three houses.

And in phoenix for the winner, we had our cave in the summer. Then we had this house in either her falls, we go back. The road near us was getting buzzer and buzzer.

Er IT sounded like a highway five lanes IT seemed wasteful to have so many houses. We have some issues with the fairness. With super big yard, we wanted to simplify.

We decided to sell IT, but the pro wasn't quite ready to give up the house. And I had thought he had family there. We like the community.

And so we we saw that midd century house and then bought a small house near the river, just south of downtown IT. Was a project, has something to work on, remodel. Pandemic came.

We shelter there for a time. But then we sold that house in the summer twenty twenty for a slight profit. We made a profit on the century modern house that we sold.

Now here we are, three and a half years later, preaching four years, and we have regret. I wish we hadn't sold that small house. And I have false, the Prices of skyrocket.

IT would be nice to have that as a rental or or just a place in the height of false, because our cabin is pretty remote and sometimes it's nice to get back into the city. The pro has regret that we sold that midd century modern house that we book, the house and phoenix, all these regrets. So what do we do? Well, the first thing is to have perspective, and we did to remind ourselves why we made the decision and what happened.

Because we made that decision, if we hadn't sold those two houses, we would not have had the capital to purchase our home in two son. Because at the time we bought that home later in the fall, twenty, twenty much more competitive market, you basically needed to do all cash offers in order to get a house. And if we hadn't sold those houses, we wouldn't have had the cash to do that.

We keep perspective, remind yourself that, that we did simplify and there are benefits to simplification. We remind ourselves of the things so we didn't like about that house, the smaller house, the fact that we redid the woods, floors, pain of them, White. And then I would attract all that wasn't done right, and attract all this lengths.

So we were having to clean these White floors all the time, that the house still needed a lot of work, that we had difficult finding contractors at that time. But there's all these things that you sort of sometimes we don't remember some of the other things that we didn't like about something and only regret missing out because we made a choice. It's roading out our perspective, remembering what we did and why.

As an professional investor, back when I manage assets every quarter, I wrote a quarter bly market update for our clients, and I kept notes of what I was thinking at at any point time. And I ve got to do that with money for the rest of us for the every month. For pretty much the past ten years, i've written an investment conditions and strategy report.

I document my portfolio trades when we make a change to the mono portfolio ample es, we document that. So we know what we were thinking at the time and know what our decision process was, what were the reasons we made that decision and and look back and help us manage that regret. Second thing we can do is consider, what do we learn?

One of the members in in this foreign post and regret, one of the phrase is that he learned in Judith, is you either win or you learn, and both ways you win. And so when we think about regret, either making decision that didn't work out, feeling bad, or not making a decision and feeling like we missed out on games, we can think about what we learned in the situation with these houses. And I, to hope, falls the pro.

And I was reminded of a concept that we talk about frequently, and i've discussed on the show who way IT comes from the double in ancient chinese pho. Sophy IT basically means action through inaction. But IT isn't so much that we don't take actions.

It's more patient with their actions to wait for the right time. Don't force thin. We should have waited a while before deciding to to sell that house.

We made the decision too quick. Within a month, let's sell IT. Maybe was two months. We should have taken our time.

I was reminded of this when we were traveling in mexico over the break, we were in isp hl. Near the police border. And this town, they're building the the mine train all around the ukazes insula.

And this town was really busy. They were doing all type of construction works of a lot of workers there. And they were rose closed because they were turned up, put in sures.

And I just was trying to get to an ATM. There was was the second A T M. The first A T M, I went to our car, didn't work.

Second A T M, I just needed to get close when I tried for probably ten minutes to find a way to get over where they say T, M, was because of the one way streets, the closures, all these people. S, and finally, I just. Decided to, k, i'm not going to the A, T.

M. today. It's all right. Just wait for the right time. And the next day, as we were traveling and I was worried about running out of money, running out of cash is something that has happened in the past.

When I traveled, I have this maybe obsessive fear of not having cash and not being able to find the, and having been stranded in japan at one point because of that. But we found the A. T.

M. The next day. And IT worked out by just being patient, and that's what we learned from the situation with these houses in either whole false.

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Comes last, David, all over case go to sharp fy dot com slashed David upgrade you'll selling today shop fy dot com slash David. The third thing we can do to help manage our regret is to remind ourselves that what happened was only one path. There are alternative things that could have happened.

They will use the example of buying these long duration bond. E. T. S. Again, we suffer from hindsight bias.

Looking backward, that looks inevitable that interest rates in this case are going to fall. Thirty year treasury hadn't exceeded five percent since two thousand seven. But we I have documentation. I know what I was thinking in september, october twenty twenty three because we did podcast on IT episode eight, where our interest rates head next.

At the time, the ten year treasures was four point three, five percent, and the thirty year treasury was four point four percent, I said, so when we step back, think about where interest rates going. If we get more ideas, greater productivity, faster economic growth with plenty of jobs that can lead to potentially higher real rates of interest I higher neutral rate of interest, but modest levels of inflation because there isn't the capacity constraints because we're kind of at that equilibrium. So there was a path for real wage to go up and on wage to go up.

One path that could have happened, I continued. If, however, there are fewer new ideas, population shrinkage, lower productivity, lower economic growth. That was ad to lower real rates, except because of the high national debt burden, the huge supply of debt that needs to be and ced that could push rate in the opposite direction.

Talk about uncertainty. I wasn't confident that interest rates are going to fall in the fall of twenty twenty three. And we've discussed in several follow episodes what determine interest rates. I didn't know how the term premium, which had just got in positive in september into october IT, could a wide even more, two to three percent, if market participants suddenly decided to freak out about the national debt because marketing driven by stories? And if the national debt sudden becomes the concern, the credibility of the central bank interest rates could rise meaningfully from where they are today or where they were back then.

So I was in september, what I did says what we know air rates were then we knew the market temperature and we knew we could lock in yells back in september. But then in october, october twenty, twenty, twenty three, I released episode four fifty three on the Price of money. By then, the thirty or treasure was to five point one nine percent in the ten year, four point nine five percent in discussing what could keep interest rate higher, I said one of the uncertain ties as how much capital will be needed for investing for capital projects, for example, A I or for geopolitics, spending on military, given the military conflicts around the world, while governments feel like they need to boost their military spending in barrow, the mind to do that, that could put up with pressure on interest rates.

The desire is sure to take factories over over season and move that manufacturing onshore. That takes investments and new factories, investment in Green energy, the energy transition, batter technology. There's all these things out there that could drive more borrowing, more demand to borrow money could push up the real rate of interest.

Now in february twenty and twenty four, we have the ten year treasure of four point one five percent and the thirty year at four point three five percent, about where they were in september twenty twenty three, but lower than they were in october twenty twenty three. This member should pass himself on the back for capturing this game, this sixteen percent game, for locking in that rate. Others would have locked in by buying trips at that time like I did, and they're up.

There's always something else we could have done to make more money. There will always be an investment that we missed out on. So the third thing is a recognized.

This is just one path IT took IT could have gone the other way. Bridge could have gone up even further from october twenty twenty three for most of the time. From the late one thousand hundred and seventy i've until two thousand seven, thirty year traffic by tour, over five percent, often over eight percent.

Even into the midnight ties, we could have gone that right. The term premium could a state positive and gotten even higher IT. Didn't rates fill some? Not much. He bat thirty year treasuries this year, beginning of the year, those language funds are down four to seven percent year a day. And that gets to something will talk about here in the moment, signal versus noise.

But the fourth thing we can do to help manage regret is to reduce the scale, to think about what how much would we have actually committed to that investment idea that we doubt on? How long would we have stayed in? One of the other members in the forum discuss bitcoin.

He was an earlier adopter bitcoin, and subsequently traded his way out of IT. Thinks about bills. Regret for what? What might have happened had I stayed in, but recognized he probably would have sold IT before, increased much.

I sometimes still regret about my bitcoin choices. I was trying by bitcoin at forty dollars per coin in twenty twelve, but I didn't trust IT enough to go through with that. I had trouble getting money into mount cox, which was the primary exchange at the time.

And I tried for several weeks and I just I didn't trust and I didn't I didn't go through with IT IT wasn't till three years later that I bought bitcoin in April twenty fifteen. The same time we did episode episode. I was buying at two hundred dollars per coin, so five times higher than I would have done in twenty twelve.

But I wasn't confident and enough to invest big. And I sold most of IT nine months later in january twenty sixteen. As much as I could, I could only sell three thousand dollars a week. So I sold three thousand dollars a bitcoin, which would be worth over three hundred thousand dollars today.

What could we have done with that money? But what I have kept IT, what I ve sold later, eventually bought more bit going back in twenty seventeen, and have sold occasions when bitcoin it's gotten up. But I I recognize i'm not comfortable having more than six to seven percent cyp to currency.

And when I gets above that, then I sell. And so I would never be A A cyp to multimillion ae because I don't have the temperament to hold on. And so we have to think about reducing scale.

And I discuss going to trading academies. We have these teachers boasting about their trading process, but they never tell you how much money they're trading. It's way easier to trade small sumps that IT is to trade large thumbs are motions are impacted more by large thumbs.

So when we talk about reducing the scale, think about would IT changing what I the emotional temperament to hold on through the upset downs, reducing the scale and realizing that no IT, maybe I wouldn't have been able to do that can help us feel less regretful. A fifth thing we can do is separate the signal from the noise. Financial markets are very random, especially in the short term.

There can be an an trying sic value of an asset, let's say, a stock based on the value today of future cash lows. But that Price is move in all over the place. We've had interest rates now where they were back in september, but lower than they were in october is just noise percent options have changed in terms of how quickly the central bank Better reserve a lower interest rates that influenced rates as has inflation expectations, the term premium, we can feel regret about moves over a three months, period, time or long term investors.

What we should care about is the underlying drivers of return the cash flow by buying londres ation bonds and holding them for years because in the short term, c is could have gone either way, but over the long term, that cash low can compound, which is why we have spent two episode talking about ways to lock in higher yields. So we don't have to worry about the day to day movement of interest rates that we've blocked in that cash flow, which can compound over the break. I mentioned, I read, fooled by randomness, by a semicolon.

He recognizes that he's emotional, and then there are things we need to do to controller emotions. But IT isn't. He said that takes them off, and people left him about improving their behavior. He mentioned that every smoker knows that cigarettes cause lug cancer IT IT doesn't have an impact to lecture somebody because we're emotional, we have to do other things. One of the things that he pointed out was because of loss aversion, that losses feel worse than how good we feel with the comparable game and because of the noise of markets.

If we're looking at a portfolio on a daily basis just to sheer noise and random, will be exposed the gains and losses on a data day basis, but the losses will make us feel worse than the gains to make us feel good. And that, that constant exposure to those negative hits from losses is just noise. Random movements could lead us to make poor decisions to get out.

I can't stand the pain. That's one reason I stop trading futures back in twenty twelve, the same time was trying to IT coin. They were so valid all that I couldn't control my motions around.

What talent does is he only looks at his portfolio if a particular trade hits a certain threshold. Ld, it's gotten hit A A dollar threshold to wear. He can feel more confident, but the movement is due to some type of signal, not random noise, and that helps him control.

Is emotion the same way he says he doesn't put chocolate under his desk because it's just sit there and you're thinking about eat? So we have to put controls in place often times to help make Better investment decisions, Better life decisions and Better manager regret. And in his case, he is certain threshold in mind.

I only look at my portfolio wants and I look at IT because I compile IT is part of what I share money for the rest of plus. So once a month, i'll look at what happened, where are we today? What is the market temperature? Should I make any changes? But once a month, and that keeps me from looking at IT during the month and perhaps making rash decisions.

So that's what we can do in managing regrets for the big regrets. We managing by minimizing things that can ruin us, the maximum regret, take precautions to do that. And that leaves us them to manage the the smaller regrets, which we are unavoidable or just going to feel.

And so when we feel the regret, we can walk through and put them in a perspective, remind ourselves all of our decision making process and what happened and what IT happened. We can think about what what do we learn from the process. We can remember that what happened was only one path, that there are alternative histories that could have happened where IT might have been completely different.

For thing we can do is reduce the scale, recognize that. Yeah, I missed out on that. But the reality is I probably wouldn't put much money, and if I wanted to avoid ruin, minimized my maximum regret yeah, I feel bad, but I would not have been life changing because I either would have sold the successful investment, so I didn't get to be a big portion of my network.

And I reduce the scale, realized, yeah, IT feels Better. We we never would have put that much in. We would have gotten out before we became too big a part of our portfolio. And then the fifth thing we do is to separate the signal from the noise by avoiding much of the noise by not being in the markets day by day.

And if you are put threshold in place or something to keep you from being constantly exposed to random, this on the downside and the upside, recognizing the downside ronis can lead us to feel worse than the upside. And so by not looking at a portfolio as frequently, we're not as exposed to that noise. And then we can focus on this signals, the long term drivers, a return, and that's why we spend so much time on money for the rest of us.

And as camp teaching these long term driver, showing people the impact of dividends and earnings growth on stocks and setting realistic expectations for this compounding that can help us grow our wealth over time. So there's a ways to manage regret. We're gonna IT.

We just have to manage IT that episode for sixty five. Thanks for listening everything I ve shared with you in this episode spin for general education. I've not considered your specific risk situation.

I've not provided investment advice. This is simply general education on money investing in the economy. Have a great week.