Between fear of losing and fear of missing out, you cover a big chunk of bad investing decisions.
Nobody likes to miss out on what seems like easy money (it never is easy). And they definitely hate to lose even more. Yet, following both lines of thought leaves you in a vicious cycle where you never get anywhere.
Avoiding or breaking that cycle should be your goal. I believe the best way to do it is through experience, knowledge, and better planning.
It’s not the perfect way because some people will always let fear drive their actions no matter how often past experience or wisdom tells them differently. For everyone else experience is a great teacher. And actively learning is just healthy.
If you’ve never experienced a 20+% loss, your first reaction will be different from the second time it happens, which should be different from the third and so on. Experience teaches you market losses are scary but temporary. Starting earlier gives you more chances to experience a big loss (and more time to recover), making the next time less scary and easier to handle.
In theory, losses should be easier to deal with if you have a good plan in place. There’s less fear of losing if you’re financially secure. By this, I mean you’re saving money, your debt isn’t debilitating, and you have cash set aside so if there is a big loss, you won’t have to touch your investments.
Someone who is financially sound with a cash cushion will react differently to a big loss than someone without a cash buffer to fall back on. Just like a financially sound person will react differently from someone who is a financial mess. What separates the three is the amount of planning ahead.
Simply, a sinking ship is a lot less scary with a lifeboat. Anxiety and stress still exist, but much less than if you were forced to tread water.
You can see this as an emergency fund for all the unplanned moments that life throws your way.
Or you can see it as a cash allocation which sets aside a specific amount of your investable money in cash. A cash allocation offers you certainty when things seem most scary and it offers opportunity when the scariness subsides.
Both work great. However, a cash allocation requires a systematic process that must be followed at all times. By that I mean, when X happens you always do Y. This is not easy to do because it runs opposite to the fear cycle I covered at the top.
In either case, you have to be financially sound first, which only happens one way. Save money first, then spend what’s left. Set aside some savings as a buffer and invest the rest in a low cost, long term plan. It doesn’t get any simpler.
- A Wealth of Common Sense: Why Simplicity Trumps Complexity in Any Investment Plan (Book)
- MiB: Richard Thaler on the Human Side of Economics (Podcast) – Masters in Business
- The Fear Factor Behind Stock Prices – BloombergView
- Let’s Try this Market Metaphor – Crossing Wall Street
- Howard Marks: The ‘Uncomfortably Idiosyncratic’ Billionaire – Observer
- Focus on the Opportunities, Not the Shoals – C. Richards
- Smart Beta Products May Not Make Bad Decisions But They Do Facilitate Them – Value Perspective
- How Should We Think About a 60/40 Portfolio? – Irrelevant Investor
- Jurassic World: 7 Reminders for Investors – J. Brown
- What is Staying Power? – Fundoo Professor
- A World Without Work – The Atlantic