We’ve been on quite a roller coaster ride over the past few months, haven’t we? A roller coaster can be scary with all the twists and turns, but it’s usually not dangerous. The distinction has been largely lost on many folks recently.
Without question the recent past has heightened our awareness to all sorts of risks, both real and imagined. Some things are scary but not dangerous (e.g. the rollercoaster); other things can be scary AND dangerous (like sharks or some snakes).
This scary/dangerous distinction relates directly to financial planning because of our innate impetus to make decisions based upon fear. I have written previously about how powerful (and destructive) fear can be. Fear is fueled by emotion and facts rarely get in the way. Danger usually has data to support the amount of danger you face when you make certain choices. The key is to avoid letting the emotion of fear overtake the rationale of danger. The financial planning framework helps keep fear in check by setting out concrete action steps along the way.
Conquer Your Fear
One way to conquer fear is to run straight to it, to tackle the scary thing head on. As adults we have life experiences that inform how much or little we react to fear. We know from these life experiences that there aren’t monsters hiding in the closet. When we were younger, (ok-MUCH YOUNGER), we didn’t have this reservoir of experiences and we depended on our parents or others to help us navigate fear. Sooner or later we open the closet door and see the coast is clear of monsters.
Investing is a lot like dealing with the monsters hiding in the closet. As long as we keep the door closed tight and cower under the bed covers, fear wins the battle. Ultimately, we can’t achieve what we cherish most without encountering some things that appear scary at first. We have to venture out and take some risk.
From my vantage point, besides the brain chemistry that generates our fright in the first place, most of the state of being scared about investing relates to being uncomfortable with control. Specifically, since the power of the financial markets rests with millions of participants throughout the world, we can’t control what occurs day by day. That’s flat out scary to many successful individuals.
Almost everything in life, including making financial decisions, can be scary at times; that doesn’t mean these choices have to be dangerous. There will be many days, weeks, months, and even some years where the broad stock market declines. Overall, however the stock market performance is asymmetric, the good far outweighs the bad. Start there.