In March 2020, Daniel Reeves had been investing for eleven years. He had a straightforward portfolio — mostly broad index funds, a small allocation to bonds, accumulated slowly across his mid-thirties. Then the market dropped 34% in thirty-three days.
He sold. Not in panic, exactly. In exhaustion. He told himself he’d wait for clarity, then buy back in. Clarity arrived eight months later, when the index had recovered nearly everything. He bought back in at a higher price, convinced he now understood the pattern.
He didn’t lose his principal. He lost something harder to see: approximately eighteen months of compounding, plus the spread between his exit price and re-entry. On a $140,000 portfolio, the gap worked out to roughly $31,000. Not in losses. In foregone gains — assuming continued market growth after re-entry at the higher price.
That distinction matters more than it sounds.
Why Regret Is a Financial Variable, Not Just a Feeling
Regret doesn’t sit quietly. It compounds through behavior — pulling investors toward decisions that feel corrective but function as second mistakes layered on top of first ones.
Behavioral economists distinguish between two types of regret in investing. Regret of action — selling, switching, reallocating — tends to be vivid and immediate. You remember exactly when you did it, what the screen showed, who you told. Regret of inaction — the fund you didn’t buy, the contribution you deferred — arrives years later as a vague arithmetic of what might have been.
The asymmetry is structural. Action leaves a timestamp.
This difference shapes behavior in predictable ways. Research consistently shows that investors take on more risk to avoid regret of action than to pursue future gains — meaning the architecture of regret itself creates a bias toward passivity after a visible mistake. You don’t re-enter the market. You wait. Waiting feels prudent. It isn’t neutral.
The Sunk Cost That Lives in the Portfolio
Laura Pinto, forty-one, a senior project manager three years from a planned career shift. In 2019, she bought a concentrated position in a single sector — not speculation, she’d remind you, just conviction. The position dropped 47% over fourteen months.
She didn’t sell. Not because she had new information. Because selling would have made the loss real in a way she wasn’t ready to accept. Her original thesis had dissolved; the holding had become a monument to a decision she wished she’d made differently.
This is the sunk cost fallacy expressed as a portfolio allocation.
The money was already gone. The only relevant question is: where does this capital go from here? But regret reframes the question entirely — turning a forward-looking decision into a backward-looking one. She was managing a story, not a portfolio.
She held for another two years. The position partially recovered, which felt like vindication. It wasn’t. During those same two years, the broader equity market returned roughly 38%. Her partial recovery returned 19%. The opportunity cost was real, silent, and invisible on her brokerage statement.
What the Numbers Show About Regret-Driven Decisions
Here is a simplified illustration of how regret-driven behavior compounds over time. Two investors, same starting balance, same contribution rate — one structural difference in behavior.
| Scenario | Starting Balance | Behavior During Drawdown | Capital After Re-entry | Estimated 10-Year Balance (8% avg. annual return) |
|---|---|---|---|---|
| Stays invested through -30% | $100,000 | Holds position | $100,000 | $215,890 |
| Exits at -30%, re-enters after +18% rebound | $100,000 | Re-enters at reduced capital base | $82,600 | $179,080 |
The gap — roughly $36,000 — doesn’t arise from a bad investment. It arises from one behavioral response to regret. The re-entry at a higher price locks in a permanent capital reduction that compounds quietly across the full decade.
That is the actual cost.
The Regret You Don’t See Coming
There is a subtler version of this problem. It doesn’t arrive after a loss. It arrives after a win — specifically, after a gain that felt like luck rather than process.
An investor who made money in a particular asset during a strong run often draws the wrong conclusions. The confidence that follows isn’t analytical; it’s narrative. I understood something others didn’t. The next allocation reflects that story. Regret arrives two years later, when the story fails to repeat.
You are not planning for the average outcome. You are planning for your specific sequence of events — the timing, the choices made under pressure, the stories you tell yourself about why things happened the way they did.
This is where regret becomes compounding risk: not just in the moment of the mistake, but in the revision it quietly produces.
A Framework for Moving Forward
The goal isn’t to eliminate regret — that’s neither realistic nor useful. The goal is to prevent regret from functioning as investment strategy.
Three structural adjustments tend to interrupt the cycle.
Separate the decision from the outcome. A decision can be sound and still produce a bad result. It can be unsound and still produce a good one. Evaluating your process rather than your outcome is harder than it sounds, but it’s the only honest accounting. If Daniel had exited based on a documented, thesis-driven rationale and re-evaluated based on evidence, his re-entry timing wouldn’t have been governed by guilt.
Establish decision rules before the market moves. Predetermined thresholds — when to rebalance, when to exit, what conditions would change your allocation — remove regret from the equation because the decision was already made when your thinking was clearest.
Account for opportunity cost explicitly. Most investors track what they lost. Fewer track what they failed to gain. Both numbers are real. A simple record of benchmark returns during periods you were out of the market makes the cost visible — which is the precondition for taking it seriously.
Laura, Revisited
Laura eventually sold the concentrated position — four years after most measures would suggest she should have. She reinvested into a diversified allocation, this time with written criteria for how she’d evaluate its performance going forward.
She didn’t recover what she’d missed. Nobody does. But she stopped asking that question. The portfolio she has now is governed by a process, not a narrative about the past. That shift — from managing regret to managing the portfolio — turns out to be most of the work.
The Takeaway
Regret in investing isn’t a character flaw. It’s a structural force that, left unexamined, functions as a silent tax on every future decision. The investors who navigate it well don’t feel less of it. They’ve simply arranged their process so that regret cannot write the next trade.
The market doesn’t know what you paid. It doesn’t know what you missed. It is indifferent to your history.
That indifference is, quietly, the most useful thing about it.
