Can Fear Make Us Better Investors?
It’s an investment dilemma. In tough markets, investors are sometimes wracked by fear and anxiety raising the question; are either of these emotions helpful?
Feeling fear can be a healthy response to real danger for which you can prepare a plan of action. For example, if you meet a bear in the woods, this is a real danger which is accompanied by fear. As the cowboy stranger so rightly said in the “The Great Lebowski”, one of my all time favorite movies, “Sometimes you eat the bear (sic), and sometimes, well, he eats you.”
The fear we feel when confronting the bear is S0 real and can be handled with a series of actions and a lot of praying. You don’t chase or approach a bear at close range. You shout, wave your arms, bang pots and metal objects. You stand your ground hoping the bear will go away sooner or later.
Feeling anxiety over the possibility of encountering a bear could cause you to exaggerate the danger, and lead to irrational responses like forever avoiding the woods.
In today’s modern world, the chances of meeting a real bear is unlikely, but a type of bear that investors will always encounter is the bear market.
Which emotion does a bear market instill in you? Fear or anxiety?
If you are feeling fearful, you can take appropriate action:
1. Identify the fear. If you have a fear of losing your money permanently, examine your portfolio. It is important to assess whether the failure of any one investment would irreparably harm your overall wealth, or simply reduce your future rate of return.
2. Formulate a plan of action to respond to real danger. For example, you can sell the stock, and make sure your remaining investments are well diversified. Mutual funds or index funds are a good way to diversify. Healthy fear. Healthy reaction.
If you are feeling anxious, consider the following:
You may have already diversified your portfolio, but you continue to remain overly anxious and tempted to sell everything. This unwise move may cause permanent damage to your future security. It is an irrational action created by anxiety, not fear.
