It is likely that when you started investing you were slightly hesitant about the risks associated with the stock market. However, fear is a powerful emotion, and when harnessed correctly can be used as an important motivator to stay disciplined and committed to your long-term investment plan. The following article will outline some of the common fears associated with investing, and how you can overcome them.
Fear of the unknown
A major concern for many investors is that they do not know how the market will perform in the future. Although investors can look at past performance, this is not necessarily indicative of how the market will react to future events, thus, causing hesitancy for many investors. This is because humans are naturally wary of change and prefer to remain in their comfort zones. However, remaining highly risk-averse may lead to larger opportunity losses and potentially reduce your ability to generate wealth for your future.
Another trap for investors is the often negative news that is covered by mainstream media and places a strong emphasis on the unfortunate events occurring in the world. This may lead some investors to overestimate the probability of negative events occurring which may have an implication on their attitudes or approach to investing. This negativity bias can impact how investors assess risk as well as their ability to understand and respond to market events. Therefore, this may reduce the risk that investors are willing to take on as they wish to take preventative action ‘just in case’ a negative market event occurs. The result of this is that investors may not be exposing themselves to an appropriate level of risk over a long-term period and therefore could reduce their overall returns.
Fear of missing out or FOMO is a common phenomenon experienced by many individuals, however in the context of investing it is often seen when individuals choose a particular investment or asset class because everybody seems to be doing it. This, however, could be detrimental to your individual investment strategy if it does not align with the level of risk you wish to bear or your short, medium, and long-term goals. Just because ‘everybody’ is investing in a particular asset does not necessarily mean it is the ‘best’ or ‘right’ thing for you. It is important to consider your individual circumstances and whether that choice is appropriate for you to meet your financial needs and objectives.
Fear of loss
Humans have a natural desire to avoid loss, which may lead to investors acting at the wrong time in the market. Individuals that have a fear of loss, instead of maintaining a long-term investment approach and not responding to short term volatility, may instead sell when prices go up and hold onto their assets when prices drop. Responding to short term noise in the market due to the fear of realising a loss may be more likely to result in an actual loss of capital than if you were to hold your investments and ride out the day-to-day peaks and troughs. To read more about the benefits of long-term investing, click here.
There is a common misconception that the more choices available to individuals, the better off they are. However, this is a myth that can actually lead to choice paralysis or choice fatigue. This involves the phenomenon when individuals are presented with too many options, they become afraid of choosing the incorrect option and hence decide against choosing anything at all. Therefore, due to the vast array of asset classes available and the individual holdings within these classes, investors often feel overwhelmed with what to choose and which option is the most suitable for them. Hence, potentially resulting in them choosing to not invest at all, and missing out on time in the market and the opportunity to grow their wealth.
It is clear there are many different barriers to investing, but despite this, there are some key strategies that individuals can implement throughout their investment journey to help them reduce their chances of acting on a whim due to these fears.
It is important for all investors, including those just beginning as well as seasoned professionals to ensure they continue to educate themselves. This includes the basic fundamental of investing such as the long-term investment strategy, dollar cost averaging and diversification. If you are a more advanced investor you may want to conduct additional research to reduce the anxiety associated with market fluctuations or changes in the economy. Please click the following link to learn more about dollar-cost averaging.
Furthermore, prior to beginning your investment journey, it is critical to establish your short-, medium- and long-term goals. These goals will differ from person to person and are central to your investment strategy as they will determine your investment time horizon, the assets you choose as well as your overall appetite for risk. Advanced investors can also revise and amend their goals and objectives to ensure that their current strategy remains appropriate for any life changes that may occur such as career changes, family planning and the transition towards retirement. This is an important step as it is likely that investors’ objectives will change over time and revising these goals will help to ensure that you are following a strategy that enables you to achieve them. Therefore, highlighting the importance of ensuring your goals remain a paramount focus when determining your investment strategy.
Establish an investment strategy
Now that you are equipped with some of the basics around investing and have a clear understanding of the goals and objectives you wish to achieve, it is important to now devise a strategy that takes these variables into account. Establishing a clear and structured plan will allow you to maximise your potential returns as you are not responding to short term market noise, instead, you are remaining focused on the bigger picture and a long-term timeline.
Having a strategy also enables you to remain disciplined and committed to the goals you have set for yourself whilst allowing you to tweak your approach over time based on significant changes that may need to be taken into account. To read more about the benefits of regularly investing, click here.
If you would like further guidance to manage your current investment strategy or professional advice that considers your investment fears, please click the link to organise a complimentary 20-minute phone call with an EPG Wealth adviser.