Regret is that sad feeling we get when we wish we had made a different decision. When was our last "should have, could have, would have" moment? Perhaps we were disappointed in the outcome of a decision we made and probably felt like we missed an opportunity. We'll need to overcome regret to build confidence in our investment decisions.
We constantly make decisions between multiple paths. Some decisions are small, like what to order at a restaurant. Others are much larger, like whether to go to college or what investments to make.
However, all decisions have an opportunity cost.
When making a decision, we often only think about the cost associated with our choice while ignoring the choices we didn't make. Considering the potential outcomes of different options is part of making a better-informed decision.
Where paths diverge
When faced with an investment decision, applying opportunity cost means listing out each of the potential outcomes in addition to how much cash we need for each. Then, compare and choose the one that we expect will give us the best chance to reach our goals. We'll experience less regret and more confidence because we knowingly passed up the potential benefits of a different choice ahead of time.
No matter how hard we try, things don't always go as we expect. It's usually because of something we didn't consider or we can't control. However, using opportunity cost enables us to learn from our mistakes (because everyone makes mistakes) rather than regret them. We can go back to our list to identify where we went wrong or what we missed and factor that in next time.
One of the most challenging decisions we inevitably face is when we've made bad investments. It's hard to decide whether to take losses and sell or hang on while the price is dropping.
Think about what your investment goals are and consider the potential benefits of making a different choice. You aren't trying to come up with every possible choice. The point is to slow down, so you make thoughtful and intentional investment decisions rather than emotional and irrational ones.
Maybe you came into some extra money, and you're thinking about going on a little shopping spree. Using opportunity cost means looking at the cost of buying a new pair of shoes differently. It isn't just the money you spent to buy them; it includes all of the potential gains if you had invested that money instead.
Let's say you want to invest that money; where do you invest it? If you put it in a retirement account, it could be many years (even decades) before we can access it. You'd give up your ability to spend it while it's in the retirement account.
Perhaps you know where to invest it, but you're torn between different types of investments, say high-growth stocks or dividend stocks. If you invest in growth stocks, realize the opportunity cost is the income and returns you could have generated by making a different investment.
Most importantly, think about how the opportunity cost of each choice relates to your investment goals. When you've made your decision, be confident and open to learning from your mistakes.