Fear is a universal emotion that has been hardwired into humans since the dawn of time, with one primary function: to keep us safe.
It’s evolution’s way of increasing our awareness of threats, triggering the fight, flight, or freeze response when we perceive danger in the vicinity.
While this instinct is crucial for survival in the wild, it can also affect areas of your life where such heightened caution isn’t always helpful – like your investments and financial portfolio.
So, with Halloween approaching, read on to find out how fear can influence your investments and what you can do to manage it effectively.
The fear of losses can lead to panic selling
For our ancestors, it was advantageous to interpret a rustling in the bushes as a potential predator in search of its next meal. Although the sound was likely harmless nine times out of 10, the instinctive fear response was crucial for survival during that rare instance when the threat was real.
This instinct led to the psychological phenomenon known as “loss aversion”, which is the human tendency to feel the pain of a loss more acutely than the pleasure of an equivalent gain. It’s nature’s way of telling you to be cautious as there could be something nasty lurking in the dark.
However, out of the wild and in the world of finance, this instinct can be limiting.
When markets experience volatility or downturns, it’s natural to feel anxious about potential losses. This fear often triggers panic selling, where you hastily sell off assets at a loss to avoid further declines.
However, this reaction can lock in those losses and cause you to miss out on potential market rebounds.
While it may seem sensible to cut your losses during a dip, doing so could prevent you from benefiting when the market recovers.
It’s important to remember that a drop in your portfolio’s value is only a paper loss until you sell. By holding onto your investments, you allow them the chance to recover, as markets have historically trended toward growth over the long term. The graph below shows how average returns turned negative during several global crises since 1987, only to experience significant rebounds in the following 12 months.
Source: Forbes
In these periods of sharp declines, reacting to your fear and selling might have appeared to be the safe and logical option. Exiting the market, however, would have meant missing out on the substantial gains that often followed in the next 12 months, frequently recovering and exceeding all losses.
So, while your fear of making losses may push you toward panic selling, subduing that fear and holding your investments has typically proven to be a better strategy for recovery and long-term success.
The fear of exclusion can push you into joining the herd
The fear of exclusion is a powerful psychological force that speaks to our deep-rooted need for belonging, acceptance, and to feel part of the group.
In the wild, being left behind or missing out on an opportunity could be a matter of life or death. So, the fear of missing out – or “FOMO” as it’s colloquially known – can cause feelings of anxiety and compulsive behaviour.
When it comes to investing, FOMO can lead to a herd mentality.
For instance, you might feel drawn to invest in a high-performing stock generating a lot of buzz because you’re worried that if you don’t, you’ll miss out on potential gains.
However, giving in to this urge can result in impulsive decisions. Investing without proper research or consideration of your long-term strategy has not typically been the surest route to sustainable growth.
For example, during the late 1990s dotcom bubble, investors were eager to cash in on what appeared to be a guaranteed opportunity, driven by the internet’s explosive growth.
As more people bought into the hype, stock prices skyrocketed, inflating far beyond the actual value of the companies.
When the market finally recognised this overvaluation, panic selling followed. The rush to exit resulted in considerable losses, and many companies collapsed as a result.
So, the fear of missing out inflated the market, and the fear of losses and the panic selling that ensued caused the bubble to eventually burst.
A financial planner can help you face and overcome your fears
Fear serves a vital purpose in the natural world and has helped humans survive for millennia. In the financial world, however, fear can lead you to be excessively cautious or push you into hasty, impulsive decisions.
To overcome the potentially harmful effects of fear, the first step is to face them and recognise them for what they are.
It’s then a good idea to build a disciplined investment strategy, designed to mitigate the investment fears you want to overcome. This might involve establishing clear financial goals, evaluating your risk tolerance, diversifying your portfolio, and maintaining a long-term outlook.
A financial planner can assist you in crafting a personalised plan rooted in this approach, designed to alleviate your investment anxieties and provide a path toward achieving your financial objectives.
They can help you strike the right balance, avoiding extremes of being overly conservative or impulsive in your investment choices, ensuring it’s only the flickering light behind the pumpkin’s eyes that gives you the shivers this Halloween.
To speak to a financial planner, get in touch.
Email us at hello@vwmwealth.com or call us on 0141 229 4004.
Please note
This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
