Photo (cc) by tacker
This week’s reader question is about fear — namely, the natural fear that arises whenever we place our hard-earned money into investments that can temporarily or permanently go down in value. Here’s the question:
My stocks are tanking along with most everybody else’s, I presume. Talk me out of selling them now. Thanks. — Carlos
Carlos sent this question last spring, but he might as well have sent it last week, or this morning. Markets have been down sharply over the past several days, making investors, including yours truly, nervous.
Early Monday morning, the Dow plunged 1,000 points before recovering dramatically. Then, it resumed its fall later in the trading day and eventually closed down by nearly 600 points.
Monday’s roller-coaster ride came on the heels of a dramatic slide late last week that put the Dow into a correction, which is generally defined as a drop of at least 10 percent from recent market highs.
Market corrections are not only common, they’re healthy. But falling prices are never worry-free. Fear of losing money is something we all have to confront when investing in anything other than an insured bank account.
It’s understandable to be concerned when the market gets scary. And this is a scary time. The Chinese economy is cooling, energy prices are collapsing and interest rate hikes are on the horizon. None of these is a good sign for stocks.
That being said, I’m not selling. The reason is simple: While I had anticipated a correction for a while before it finally arrived, I’m not smart enough to know when to get back in. So rather than lowering my exposure, I’ve decided instead to lower my expectations.
Timing the market with any degree of success is practically impossible. And running scared is how people buy at tops and sell at bottoms. So let’s use this frightening time as an opportunity to talk about overcoming the natural fear that accompanies investing, as well as other things in life.
The 7 Golden Rules of overcoming fear
From buying a house to skydiving to asking someone out on a date, fear is not your friend. Here are seven universal principles that will help keep it to a minimum.
1. Understand what you’re doing
Before asking someone out on a date, if you’re scared, you’ll probably ask a more experienced friend for advice. To increase your odds of success, you might also try to learn what you can about the object of your desire. What do they like to do? Are they seeing someone else? What kind of relationships have they had in the past?
If you’re going to invest in stocks, invest your time before investing a dime. Talk to someone you know who has more experience. Learn what makes markets, and stocks, move up and down. Studying history will help you understand and predict the future.
So will understanding the rules of the game. And one rule of this game is that stocks will go down as well as up.
Something that applies to everything from investing to mountain climbing: There’s an inverse relationship between knowledge and fear. The more you know, the less afraid you’ll be.
2. Understand why you’re doing it
With conviction comes courage.
When it comes to seeking out members of the opposite sex, you’ll be most effective when you’re convinced a great relationship is in the offing.
When it comes to investing, you’ll be most effective when you accept that investing in the shares of great American companies has historically been a smart thing to do. And investing when others are running for the hills has proved smarter still.
You know that the stock market offers more risk than insured bank accounts, so it follows that if it didn’t return more over time, it wouldn’t exist.
I’m convinced a part of my savings belongs in stocks, even though I’m well-aware of the risks involved.
3. Don’t overdo it
If you want to reinforce your fear of rejection, ask Halle Berry out for a date.
If you want to scare yourself to death when making investments, invest money you’ll soon need, invest more than makes you comfortable, or put your money in silly, speculative stocks that are more gambling than investing.
Staring at the ceiling at night? This is probably why.
4. Expect some pain
It would be great if every relationship went flawlessly from beginning to end. But we know that’s not the way it goes. Relationships, like the stock market, have their ups and downs.
Fortunately, the potential upside of great relationships and bull markets outweighs the potential downside of bad relationships and bear markets. That’s what keeps us in the game.
I have a significant proportion of my net worth in stocks, so I know how it feels when things go south. I’ve also been divorced twice. But the decades I’ve spent as a husband and an investor have taught me to expect the bad with the good.
If it were all wine and roses, anybody could do it.