I believe that regret in investing is a forgone conclusion. We cannot avoid regret in life or with investing. But we can be stoic about the outcome of risks by deciding which regret we prefer. Minimizing regret is one of those hard to quantify benefits of good financial planning. There are two primary regrets we aim to reduce.
- We try to avoid the regret of investing too conservatively.
This is the stance of a risk-seeking individual. Chances are that you would end up with more money later in life with an aggressive allocation to stocks. While a low-risk portfolio experiences smaller drops in value, later in life you might end up wishing you had owned more stocks with high return potential.
There is a downside, however. If you are wrong and experience poor market returns, your retirement dreams would have to be adjusted downward. Now, I'm not going to preach that you should sell your truck or put off going on a big trip just because of a stock market drop, but investing to minimize the regret of missing out on big gains has its risks.
- Alternatively, we try to avoid the regret of putting your retirement at more risk than is necessary to achieve your goals.
This is the more conservative portfolio allocation stance. It means setting aside 10-20 years’ worth of investments in assets with lower risks than stocks. We know that low-risk investments will produce lower returns over long timeframes. Assuming average to strong market returns, you will almost certainly make less money with this “steady portfolio” approach (and wish you had owned more stocks).
If our optimism about the market is wrong, however, your retirement goals are much less likely to be at risk if there is a prolonged stock market decline. You can still confidently buy groceries with your safe investments and let the riskier stocks you own eventually recover. That way, you don’t have to sell Microsoft shares when they are down 50%+ just to keep your lights on!
If you have achieved enough money to make your retirement plan work and are nearing or in retirement, the choice is yours.
Do you want the Red of the Green Pill? I can help you with either, but you must “know thyself” and which regret you would feel worse about.
Please reach out to us if you are interested in a risk review. It is an honor to help.