Investing without fear can be difficult. Here are seven ways to manage fear in order to improve your investing. As well as how fear can be beneficial.
Topics covered include:
- Why fear can be both helpful and harmful
- Why expected investment returns are lower from a year ago
- What are the drivers of asset class returns
- What is a bucket approach to investing and why it can be helpful
- What are ways to automate investing
- Why getting an investment second opinion can be valuable
- Why we can never avoid investing mistakes
Show Notes
“How do I get rid of the fear?” by Seth Godin—Seth’s Blog
The Gift of Fear by Dharmavidya David Brazier—Tricycle: The Buddhist Review
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Transcript
Welcome to Money For the Rest of Us. This is a personal finance show on money, how it works, how to invest it, and how to live without worrying about it. I’m your host, David Stein. Today it’s episode 341. It’s titled, “How to overcome investing fears.”
Underinvested
I recently got an email from a member of Money For the Rest of Us Plus. He’s a lifetime member. He’s a 46-year-old engineer. He’s been happily married for 20 years, they have two sons, ages 7 and 10. He writes “Through many years of hard work, frugality, and calculated risk, we’ve accumulated a net worth of 1.9 million. Most of our net worth came from investing in rental real estate duplexes in 2012, as well as some stock index investing.”
They earn about $160,000 per year and live on less than half of that. Right now, their asset mix is 40% private real estate, 13% in stocks, and 47% in cash. And it’s the large amount of cash that is bothering him. He writes:
“We have been grossly under-invested for several years now. We recently sold our primary home and now have a great deal of cash. We live and work overseas and have no need to purchase another primary home. All investments seem to be overvalued, including stocks, bonds, real estate, gold, and crypto. As you say, we need to take risks, we need to earn a positive, real return to save for retirement. I’ve been waiting for a correction in stocks or real estate for several years, since 2014, and don’t want to continue to wait indefinitely, because I understand the inflationary cost of holding cash. I also don’t want to be the person that buys at the top of the market and regrets purchasing overvalued assets. Unfortunately, I was not able to enter the market during the March 2020 crash, because I was convinced the market was headed much lower.”
He then outlines their plan and dilemma.
“Rental real estate has been good to us, and I would love to buy several more rental duplexes. I feel that a real estate and stock market correction crash may be right around the corner, which would allow us to make significant long-term investments at attractive prices.
“I’ve always lived by the motto, ‘Be greedy when others are fearful, and be fearful when others are greedy.’ On the other side of the coin, I have a fear of missing out. What if the stock market continues to climb for several more years as I sit on the sidelines, waiting for a good entry point while our family nest egg of cash is slowly degraded by inflation? What would you advise a trusted friend to do in this situation?”
I thought a lot about his email in the last day or so, and there are seven things that I would tell him to do, or a trusted friend, as he put it. Now, this shouldn’t be taken as investment advice to him or to others, but these are my thoughts on the matter.
- Acknowledge the Fear
First, acknowledge the fear. As you look at his email, there’s a lot of emotion there. He mentioned the fear of missing out; there’s the fear of looking stupid because he might buy in an expensive market and stocks could fall. There’s the fear of losses. There’s the fear of not getting the timing right. And the reality is, those fears get larger as our net worth grows. Mistakes, losses become more meaningful because the dollar amounts are larger. Our fear grows as we’ve lived through more market cycles. If you lived through the 2008 financial crisis and were investing at that time, that was a scary, scary time, and we remember those fears.
Some people seem to be fearless, but I would argue that that tends to be a naive view of markets. Those that believe that markets never go down, or they’ll always be okay. I think that there’s a right balance. Fear can be good. My son Bret sent me an article by Dharmavidya David Brazier titled “The gift of fear.” It was in Tricycle, an online journal. Brazier wrote:
“Clearly, there’s a range within which fear puts us on our toes and brings out our best. When there is too little, we become complacent, bored, and lazy. When there’s too much, we become paralyzed.”
He found when he first began public speaking that he would sweat and shake and couldn’t really get the words out. He was very, very nervous, and he found the best thing to do was to tell his audience how nervous he was. And surprisingly, that actually relaxed him a little bit to be able to give his speech. He wrote:
“From experiences like this, I realize that the venom that paralyzed me was not so much the fear, as the pride that made me try to hide the fear. That wanted me to present myself as a master over my human nature. But when I could be natural and share how I was feeling, a bond was established with the audience.”
Fear can connect people. We have to acknowledge our fear. It’s not going away. Recognize it. Seth Godin points out that the only way to get rid of fear is to stop doing things that might not work. To stop putting yourself out there, to stop doing work that matters. He says the right question is how to dance with fear. How do we invest and use fear to our advantage, so it doesn’t paralyze us? But the presence of fear keeps us from doing rash things and suffering catastrophic losses.
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