Don’t Let Fear Drive Your Investing

Why it is important:

As you’re reading this, there is likely a major event in the news that may have you worried and is driving the stock market. One thing that often keeps people from becoming financially free is letting fear hijack their financial decision making. If you let emotion drive your investing decisions rather than logic, your investments will suffer.

The news and your investments:

When I was a child, I was at a friend’s house watching TV and the broadcast was interrupted to show a high-speed car chase. The entire family gathered around the TV and it seemed like it was the only thing happening in the world at the time. I had to get home for dinner, so I raced back on my bike to find out what happened. Only when I got home, nobody at my house was watching TV, and nobody knew what I was talking about when I told them “A super important high-speed chase was happening and they were missing it!” To this day, I don’t know what happened in the car chase, but I do know it wasn’t relevant long term to my life.

Why do I tell this story? You should strive to treat your relationship with news headlines with respect to your investments like my house did growing up and not my friend’s. It is good to be informed, but it is easy to trick our brains to go from being informed, to alarmed, to taking action that is not in our best interest.

Remember that media outlets are businesses and their objective is generally to sell advertisements, not to help you be a good investor. One effective way to get you to consume and share more media is by using click-bait and sensationalized headlines. When this happens, it can be easy to over-consume news and over-estimate the impact that current events may have on our lives without even realizing it. This can lead to stress, unnecessary worry, reduced productivity, and when it comes to your money – poor decision making.

Past market volatility events:

You can always find a reason to not invest. Whatever headline you’re reading about today, it probably feels like the “real deal”. Maybe it is, but unless you react in a calm and calculated manner, your investments will control you instead of you controlling them.

I’ve seen short term stock market fear damage many long-term financial futures. This happens when we make long term investing decisions (5+ years) based on events that correct in less than that amount of time. Consider your time horizon not only when you initially implement your investments, but also when you are considering making changes to your investments.

Each one of these events was a very big deal at the time and causing many individual investors to make poor long term investing decisions. It is true that these events had an impact on the stock market and caused real financial pain. It is also true that the stock market and economy recover in the long run.

One thing we know is these types of volatile events will continue. What we don’t know is exactly what they will be or how long it will take to recover. Typically the largest gains are in the very beginning days of the recovery, so if you jump out of the market – you may miss some of the largest gains at the front end of the recovery. You already participated in the risk on the way down, you should stay put to participate in the recovery as well.

Should I time the market?

We all know the first rule of investing – buy low and sell high. Due to the emotional nature of investing, many end up doing the opposite of this. When we look at our accounts and see how much money we have lost, and then are bombarded with news reports in the midst of a crisis, fear sets in and can easily take over an investors strategy.

As a result, many investors that base their investing decisions on emotion end up selling near the bottom of the market. As the recovery sets in, overconfidence builds and a different fear – fear of missing out takes over and emotional investors buy back in near the market top. The cycle repeats, and as a result, regular investors historically underperform stock market index returns.

By the time you’ve heard about the news, so has everyone else and you can bet that it is already priced into your investments. So take a deep breath and do the logical thing – stay the course. If you’ve prepared, diversified your investments properly and invested according to your time horizon already, you have nothing to worry about.

Implementation

The short answer to “Should I really invest (or stay invested) when the sky is falling in the news” is this:

Yes, this event could cause your investments to temporarily decline. If you’re investing right, it won’t matter. This is one of the few cases where doing nothing is likely your best course of action.

If you don’t already have an investing plan in place, or have difficulty sticking to it, you may benefit from working with a financial planner. A good financial planner will help you create a written financial plan, and help you stay on track with levelheaded decisions – particularly during volatile and emotional times.

If you choose to hire a financial professional, I recommend first reviewing What to Look for in a Financial Advisor to ensure whoever you hire, you can feel comfortable that they have your best interest at heart.