It is often said that the stock market is driven by two emotions: fear and greed. With Halloween fast approaching, now is a great time to examine the influence of fear in investing and how to overcome it.
Most individuals possess a natural fear of loss that inadvertently affects their investment decisions. Behavioral economists note that the psychological impact of losing money is two and a half times as powerful as the thrill of a gain. In fact, this type of “risk aversion” caused numerous investors during the 2008-2009 financial crisis to leave the stock market permanently.
These investors have continued to remain on the sidelines despite witnessing valuable buying opportunities in the past seven years since they’ve pulled out. Perhaps now is the time to consider overcoming these fears of loss and begin exploring new investment options.
Whether you’re re-entering the stock market after some time off or entering for the first time, here are a few tips to consider:
Learn before you leap. One of the best ways to overcome your fears of investing is to educate yourself. Nowadays, there are a bevy of online resources you can utilize. I recommend visiting the Securities and Exchange Commission (SEC) website where you can find multiple publications and sources targeted specifically toward investors. Also make sure to read the news daily and stay updated with current affairs as foreign and domestic events can have a major impact on your investment portfolio.
Save and pay down debt first. While investing your money is important, so is ensuring that you have a secure savings funds. By establishing your savings before you start investing, you create a safety net that can be used to meet your most essential needs first. Make sure to have at least three to six months’ worth of living expenses saved. Also if you have any large debts that must be repaid soon, allocate enough money for repayment. It is important to always take care of the basics first.
Assess your risk tolerance. All investments involve taking on some level of risk. If you are a returning investor, it is understandable that you may be wary. However, taking on unnecessary risk is often avoidable. One strategy is to diversify your portfolio so that if one investment loses money, it may be possible for your other investments to compensate for those losses. Ultimately, it will be up to you on how much risk you are willing to take.
Keep calm and tune out the noise. As new reports and announcements are publicized in the media each day, it is common for the stock market to react toward it. However, it is important to remember not to get trapped by the noise of these numbers. Avoid making kneejerk changes to your portfolio and remember to reevaluate your overall allocation.
Finally if you are still feeling a little uneasy, consider consulting a financial advisor. They can confirm what you may already know and perhaps even point out a few things you may have missed. Don’t let fear keep you from missing out on a great opportunity this Halloween season.
Anthony Paul is a Financial Advisor with the Global Wealth Management Division of Morgan Stanley in Denver. He can be reached at 303-925-9683 or Anthony.D.Paul@MS.com.
The information contained in this interview is not a solicitation to purchase or sell investments. Any information presented is general in nature and not intended to provide individually tailored investment advice. The strategies and/or investments referenced may not be suitable for all investors as the appropriateness of a particular investment or strategy will depend on an investor’s individual circumstances and objectives. Investing involves risks and there is always the potential of losing money when you invest. . Morgan Stanley and its Financial Advisors do not provide tax or legal advice. Individuals should seek advice based on their particular circumstances from an independent tax advisor. Information contained herein has been obtained from sources considered to be reliable, but we do not guarantee their accuracy or completeness. The views expressed herein are those of the author and may not necessarily reflect the views of Morgan Stanley Wealth Management, or its affiliates. Morgan Stanley Smith Barney LLC. Member SIPC.