The National Basketball Association recently released statistics that evaluated all calls and pertinent non-calls occurring in the final two minutes of games, including overtime, in which the score was within five points.
Out of the 288 plays, they found a total of 41 incorrect calls or 14.2 percent of the time. The number of no-calls was much higher and included 34 out of the 41 reviewed calls. Warren Buffett would categorize these non-calls as “errors of omission rather than commission”. Applied to investing, it is hard to believe that Buffett often states he misses more big winners than he loses in bad investments.
Another big error of omission this week was the Dow Jones Industrial Average adding Apple to the index. According to Bloomberg, if Apple was added back in 2008, the 30-company gauge would have reached 21,944.66 on 3/10/15 — almost 4,300 points above its actual level.
Similar to NBA referees, we subconsciously are making decisions by what Behavioral Finance theorists term “regret theory”. This theory states investors experience regret if they make a wrong choice, then take anticipation of regret into consideration when making future decisions. Investors’ regret can result in unnecessary risk aversion or lead investors to irrationally take more risk.
This week also happens to be the 5-year anniversary of the Dow Jones index hitting a low of 6,507 in 2009. We can all reflect back to this time and determine if our portfolios were shaped by “regret theory” through the investment decisions that we may or may not have made at this time. Many people may not realize the major impact this market crash had on whether or not they will be able to meet their retirement goals. If you did not sell through this storm you should feel no regret. However, many investors look back and wish that they had taken even more risk.
I believe there are a few ways to avoid this regret. Investors that pay absolutely no attention to their portfolios and stay diversified, normally do well over the long-term. On the other hand, investors that are looking for the next hot stock tend to experience the most regret. As a fee-only financial planner, I do my best to help my clients accumulate wealth over time by investing in businesses at a reasonable price, do their own analysis, stay diversified, take a value approach, and slowly compound returns over time. Feel free to give me a call if you have any regrets on your investments or if you want to see how a customized portfolio would look based on your personal risk tolerance, values, and goals.
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The Dow Jones Industrial Average (DJIA) is a price-weighted average of 30 actively traded “blue chip” stocks, primarily industrials, but includes financials and other service-oriented companies. The components, which change from time to time, represent between 15% and 20% of the market value of NYSE stocks.