Fear is one of the most primal feelings in the human experience. When harnessed correctly, internal fear can be an incredibly powerful motivator. However, if fear is not harnessed correctly, or if the fear is too powerful, we can become paralyzed. Paralysis by fear inhibits our mental processes and can often lead to irrational thinking. This is especially problematic when fear creeps into investment decision making.
Emotions—especially fear—should be completely removed from the equation when coming up with an investment strategy. We’ve found that the more successful investors are the ones who can overcome their underlying fears and stick with a solid, well-thought-out plan. With that said, here are six fears to look out for and overcome to help promote investment success.
1. Status-Quo Bias
Humans are wary of change, and that leads us to make choices that look to maintain the status quo. It’s also called the “system justification bias.” This fancy term basically means our fear of the unknown leads us to stick to our comfort zones. But by doing so, we may miss out on other, potentially better opportunities.
In investing, you may have stock that you’ve held for a long time, even if it’s underperforming. But it’s at least something you know, so your fear of selling it and buying something new and unknown might be holding you back from potentially higher returns.
2. Negativity Bias
It’s been theorized that we attribute more weight to negative news than to positive news. That’s why the rather morbid phrase “if it bleeds, it leads” was coined in the world of journalism. This leads humans to dwell on bad news or overestimate the probability of a negative event over a positive outcome.
This bias leads to probability neglect and affects our ability to properly assess risk, whether it’s overstating or understating unlikely events. The result is that those who suffer from this tend to take excessive preventative action. You may fear that some of your shares are declining in value (or will decline), so you sell them and move to something else. In reality, it’s possible that sitting still and riding out the storm is the savvier investment strategy.
3. FOMO Effect
Admit it. You’ve felt this at some point in your life. The “fear of missing out” (FOMO) is the phenomenon of doing something because others are doing it and you don’t want to miss out. The first dot-com bubble was a classic example of this, and it could be argued that the recent popularity boon in cryptocurrencies could be perceived in the same way.
Investors who fear being left out of a winning bet and start buying into it because they see everyone else is may be in for a very unhappy surprise. Remember the advice your mother probably gave you when you were young: Just because “everybody” is doing something doesn’t mean it’s the right thing to do. When applied to investments, just because you see a number of people investing in a certain vehicle doesn’t automatically mean you should too.
4. Anchoring Effect
The mind is biased by first impressions, and this bias is why one price acts like an anchor in our thinking. If you’re on a road trip and fill up your gas tank before you leave, whatever the price of gas is when you first fill up, that will be your baseline price for gas for the rest of the trip. Any price below that line will seem cheap, and any price above it will feel expensive.
In investing, the anchoring effect works like this: Once investors have “that price” in their mind, it acts as an anchor, and they wait too long for an investment to return to the price they purchased it at, rather than getting rid of a loser. In addition, the anchoring effect can result in missed buying opportunities as investors wait for an investment to return to “the price” before considering making their buy.
5. Fear of Losses
This is the tendency to sell things when they go up in price but hold onto them when they go down. It’s a natural desire to avoid losses and is seen over and over in stock-market trading. If you’ve been a holder in an old, dying company for a long time, your fear of realizing losses may have kept you invested in what is now a very risky situation.
6. Choice Paralysis
Intuitively, we know the more choices we have, the better. But the sad truth is that too many choices can lead to so-called “analysis paralysis” and information overload. When presented with so many options, we’re afraid that we’re going to pick the wrong one.
Deciding to buy a mutual fund may be an easy decision. However, choosing from the more than 7,500 of them is not. Unfortunately, choice paralysis will keep an investor on the sidelines, leading to missed opportunities.
The Bottom Line
Fear is one of the most powerful emotions humans are subject to, and it has always posed a challenge for investors. The best way to overcome these fears is to maintain a focused eye on the horizon and stick to your long-term investment strategy.
Fear should never be the driving force behind an investment decision. A financial advisor can be invaluable if you need help overcoming these fears or making and sticking to smart portfolio decisions.
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.
CFP®, CRPC®, Insurance License Evan believes in meaningful client-advisor relationships and has a passion for gaining a deep understanding of what is important to his clients. He fuses his industry expertise with client goals to offer ideas and strategies that align with their values. When away from the office, you may find him playing his cello (a life-long hobby), rooting for a Philadelphia sports team, or enjoying time with his wife Krista. BS, Wake Forest...Read More