“The media is full of stories saying a crash is coming, or a correction is expected – it seems like the best time to buy is always tomorrow instead of today. How do you overcome this?”
The stock market feeds straight into our primal instincts of survival. These instincts were there with primates to survive in the wild and have continued to now, although it’s not just simply physical safety and food that are the primary concerns any more. Now it’s in the form of money, the currency of survival.
Each of us expresses this survival instinct differently when it comes to money. Some just want to protect what they have and the fear of losing is pronounced. Though this instinct is inherent in all, to some it’s more pronounced and dominant. This dominant tendency may be in the group of people who have lost money in the past due to failed businesses, scams or bad investments (or just bad investment decisions) in addition to those who do not have the capacity to replace their savings. For this group, the fear of losing tends to be the dominant factor in their decision making when it comes to money.
Negative news and noises tend to be given higher credence when it comes to decision making. This “noise” or information tends to ignite the fear quicker than the average person. Warning signs may be taken as alarm bells and preventive actions may be taken prematurely.
For example, these reactions could be in the form of selling shares too early to lock in small profits whilst missing out on the big rally. It could be acting irrationally and impulsively by over-reacting to negative news and stories in the media. Inactivity (when one should be acting) is another product of this tendency.
Nevertheless this sensitivity can have a positive effect if one learns to use it as a signal “to pay attention”. Traders with a higher fear of losing can be more careful investors than the average and this tendency can translate to more circumspect strategies in managing risks of negative events, like gradual profit taking or the taking on of downside protective strategies or investing in less risky investments.
So, while thefear of losing is normal, if it is dominant then there are strategies to balance it out when investing and dealing with money. Firstly, recognise that it is dominant in you. Then one can invest differently to reduce the incidences of this sensitivity being triggered resulting in impulsive decisions. These can be investments with downside protection, those that have less volatility and lesser risk for big movements. Thirdly, as a longer term strategy, consciously overlay money decisions with a filter of neutrality when it comes to information and the consideration of risks to the downside and losses, asking yourself questions like; “Am I being objective here, am I only focusing on the negatives, or is there more upside to the fear of possible downside?” or even, “Am I overly negative and biased in this decision?” This helps and forces one to be more neutral and objective and hopefully reduces decisions that are biased by this dominant factor of fear of losing.
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|Wai-Yee Chen is an investment author and a derivatives specialist adviser. With almost two decades of investment experience, she is regularly sought by the media and shares her insights on radio and TV networks such as CNBC and SKY Business. Wai-Yee is a well-respected contributor/columnist for the Australian Financial Review and other business media. Her latest book NeuroInvesting uses neuroscience and real-world stories to explain how successful investors think differently.|