The laundry list of these “somethings” are routinely among the reasons cited by the media talking heads each day to explain the ups and downs of the stock market. We know that fear is a powerful force in determining how investors behave. But what creates this fear?
In his first Inaugural Address, President Franklin Roosevelt said, “The only thing we have to fear is fear itself- nameless, unreasoning, unjustified terror.” Perhaps President Roosevelt was one of those rare souls who had no fear of the future. In our 21st century world, however, fear about things real and imagined is everywhere.
Fear Drives Us to Act
I was at a professional meeting recently and a younger advisor questioned the group about his fear of rising interest rates and “what to do.” I asked him to unravel the fear and look at what really was underneath. In my opinion, mostly this fear is about not being able to maintain a certain lifestyle for the duration (with inflation of course).
Fear of rising interest rates or declining stock prices are really just the outward expressions of this core condition. Despite the overwhelming evidence about the futility of guessing the direction of interest rates or stock prices, fear manifests itself by nudging us to “do something.” My young colleague was falling into this trap.
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Investing is innately risky, at least in the way many investors define risk. However, there actually is little to no risk that a globally diversified portfolio will suffer permanent loss, but there certainly can be peaks and valleys along the way. Investors and some advisors seek comfort by taking a course of action that they believe will lessen the risk and eradicate the fear. Of course, this usually makes matters that much worse by moving you further away from your core goal of maintaining lifestyle in retirement.
Fear and Greed
Fear is one of our basic human emotions and is created in part by the most ancient portion of our brain. The financial markets and almost every other aspect of our lives depend on the human emotions of fear and greed.
Every time you decide to sell something because you are concerned about what might happen in the future, the person on the other side of the transaction is buying because they believe it’s a good deal. This is the essence of fear and greed at work.
While fear is part of our human condition, we need to guard against it overwhelming all else and pushing us to “do something” that may divert us from our long-term plan. Remember, the only really scary thing we have to confront is the fear of outliving our financial resources. All the other fears pale in comparison. Start there.
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