Fear and greed are the two most dangerous emotions that investors will face. But, I think fear is the bigger problem of the two. Why? Because fear can prevent you from ever investing in the first place!
FEAR leads to procrastination. It’s good to have an analytical mindset, but don’t let it lead to analysis paralysis. We can over-analyze to the point where we wait too long to get in an investment and we miss out on gains, or worse, we never invest at all and completely miss an opportunity. Don’t be afraid to make mistakes. Every good investor has made their share of mistakes. Mistakes are good. We can learn from them. A good investment strategy includes principles that have been tested over time. Assuming you are following good principles and decision making rules you will find that over time your wins will become greater and your losses fewer.
FEAR of loss will never bring reward. You have to take risks if you want the rewards of investing. There are no shortcuts. You won’t become wealthy by keeping your money in money market funds and CDs. Of course it’s important to avoid losses, but realize that risk is necessary if you want big rewards. Learn to take calculated risks.
FEAR intensifies as your portfolio grows. As the dollar amount of your portfolio grows the fluctuations seem larger. For example, lets say you are an investor just starting out and you have a $10,000 portfolio. If we have a bad year in the stock market (like last year) your portfolio may take a 10% hit, or a loss of $1,000. Now let’s fast forward 20 years and assume your portfolio has grown to $1 Million. A 10% loss on $1 Million would be $100,000. Now that’s a little harder to swallow than the $1,000 loss…huh? The loss is still the same 10% but it seems greater because you are now dealing with a much larger dollar amount.
FEAR leads to pessimism. As we get older we tend to get more conservative. That’s OK because preserving what we have accumulated in our portfolio is important as we approach retirement. But, I’ve seen it work against investors too. Some people get so conservative that they are afraid to take any risk at all. A natural part of investing is dealing with uncertainty. It seems that there is always a reason to be uncertain about the future of the economy. Most investors I know have built there wealth by being optimistic during times of uncertainty. Uncertainty can lead to fear which can make an investor very pessimistic…always looking for reason not to invest. While it’s important to consider the risks when investing you should seek to find opportunities and reasons to invest. Most successful investors I know tend to have an optimistic outlook.
Don’t let FEAR stop you from being a successful investor. Learn how to manage this powerful emotion. Learn how to determine when your fears are justified and when they should be ignored.
So, how do you deal with fear when it comes to investing?