23 August 2022

Giving in to fear can be very expensive

Global shares and bonds have been on something of a rollercoaster ride this year, with markets trading considerably lower than at the start of the year. Doubtless many investors, especially those who are close to, or in retirement, are feeling fearful.

Fear is a hugely powerful emotion. It makes us do irrational things and the sad fact is that in the context of investing, there’s no shortage of people who seek to exploit that fear.

“Fear makes money”, says Daniel Gardner in his book The Science of Fear. “The countless companies and consultants in the business of protecting the fearful from whatever they may fear know it only too well. The more fear, the better the sales.”

So, what’s the answer, apart from steering well clear of salespeople?

First things first: don’t feed the fear. When behavioural finance expert Greg Davies was invited on to Bloomberg to talk about the market rout in 2008, he was asked, live on air, what should investors do if they were really worried? “They should stop watching Bloomberg for a start”, he replied. Apparently, they tend not to invite him now.

Investors who are anxious would be well advised to do some reading and arm themselves with an understanding of the bigger picture. To do that properly, it’s going to take you a little while. If you don’t have a lot of time, you could start by reading this short article by David Booth of Dimensional Fund Advisors, on how markets reward investors who stay disciplined at times such as these.

In the article, David looks back at events over the past 25 years, reminding us that in 1997;

J.K. Rowling had just published the first Harry Potter book.

General Motors released the EV1, an electric car with a range of 60 miles.

The internet was in its infancy, Y2K was a big concern as was the Russian financial crisis.

He then poses the question that if a stranger told you that the following events would take place over the next 25 years, ‘would you invest in the stock market?’.

  • Asian contagion
  • Russian default
  • Tech collapse
  • 9/11
  • Stocks’ “lost decade”
  • Great Recession
  • Global pandemic
  • Second Russian default

You could easily have been put off investing in risky assets like shares if you concentrated on the ‘fear’ angle. Want to know what you’d have missed by acting on your fear? Over the next 25 years, despite these apparent ‘headwinds’, the US stock market returned an average of 9.8%1 a year, very close to the returns over the whole history of the stock market.

Fear can be a very expensive emotion, so part of the role of a good financial planner is to help you avoid acting on such strong emotional feelings, without first considering the potential impact on your personal financial plan. Being a sounding board or financial coach is an increasingly important part of our role.

If you are in any doubt about what, if anything, you should be doing, feel free to speak to us for some unbiased objective advice, which is almost certainly going to echo the messages in David Booth’s article; tune out the noise, think long term and disregard anything that’s out of your control. And most of all, fear not.

Here is a link to the Dimensional article:

Worried About Stocks? Why Long-Term Investing Is Crucial | Dimensional Fund Advisors

1 In US dollars. S&P 500 Index annual returns 1997–2021. S&P data © 2022 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved.

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