The news pundit on the screen sensationalizes the news of the day, stirring uncertainty in the viewer. "Will the markets go up or will the market go down? Stay tuned!" As an investor, fear and greed are by far the driving emotions that all too often prompt poor financial decision making. However, study after study in the field of Behavioral Finance provide compelling evidence that allowing emotion to drive investment decision making will result in portfolio under performance; and, therefore, have a detrimental effect on your financial plan. Yet with a little understanding about them, your fears can actually be helpful. The question is: how will you read your fears and which ones should you listen to?
If we examine the notion of “fear” for a moment, it’s closely related to imagination. When we are fearful of something, it’s normal to worry about what might happen…Our fear takes hold as we allow our imagination to explore what couldhappen. For those with an over active imagination, especially those who are naturally pessimistic (we will discuss the power of optimism another day), a small market correction could cause them to extrapolate the correction for perpetuity; stoking the fear of the need to work until age 90 while eating cat food morning, noon, and night. Many media outlets and supposed market gurus take advantage of this to sell air time and newsletters.
Equally troubling to fear of the future is fear of the unknown. When we don’t have enough information about something our imagination steps in to fill the void. Concerns about not knowing how to manage assumptions about inflation, taxes, or portfolio management can, again, take the active imagination to a scary place like a life of destitution.
The capital markets are complex and the average investor has every right to wonder and worry how their investments will fuel their financial plans. If you find yourself getting carried away by the theatrical side of your fear, it may be time for a “thinking partner”. The key to navigating and managing fear is to ensure you include the coolness in judgment of a well-educated professional when making decisions where fear is involved. As Financial Planners and Portfolio Managers, our most important job is to be that "thinking partner" and provide the context and coolness of judgment rooted in science when it comes to investing and financial planning.
This blog post was inspired by Karen Thompson's Ted Talk (11 minutes and 31 seconds, and worth the watch), where she shares a very insightful look at fear and how we can use our fears to our advantage by being better prepared for tomorrow. We couldn’t agree more! Use your fear to explore what you can do today to be better prepared for tomorrow and call us if you need a thinking partner!!!
http://www.ted.com/talks/karen_thompson_walker_what_fear_can_teach_us.html
The material is solely for informational purposes and shall not constitute an offer to sell or the solicitation to buy securities. The opinions expressed herein represent the current, good faith views of Lake Tahoe Wealth Management, Inc. (LTWM) as of the date indicated and are provided for limited purposes, are not definitive investment advice, and should not be relied on as such. The information presented in this presentation has been developed internally and/or obtained from sources believed to be reliable; however, LTWM does not guarantee the accuracy, adequacy or completeness of such information.
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