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Are You Letting Fear Cloud Your Financial Judgment?

by Miranda Marquit

When we are scared, we tend to grasp at the solution that seems, at first glance, to solve our problems and help us feel safe. However, making decisions in fear can be devastating. Fear tends to cloud judgment, rendering irrational someone who normally thinks things through. Letting fear drive your financial decisions can be devastating to your finances. Before making a financial choice — especially a snap decision — it is important to take a step back and recognize the emotions you are feeling.

Fear-Driven Finances and Loss

The stock market is an oft-cited example of what can go wrong when you let fear rule your financial decisions. During the financial crisis of 2008, and in the aftermath, a number of people, afraid of the stock market’s poor performance, sold. The problem when you sell at a time like that, of course, is that you end up locking in your losses. I was a little bit afraid for some of my investments, but I ignored my panic reaction and kept with my dollar cost averaging plan. Now, I’m seeing better returns.

Of course, there are other ways to let fear rule your finances. Some of these fears include:

  • Fear of missing out: Many people are driven to scams because they are worried of “missing” a big opportunity. Pressure to get in, or you will miss out, can work on a different type of fear that pushes you into poor decisions.
  • Fear of falling behind: Do you look at your friends and family and worry that you are falling behind? This type of fear can prompt you to spend beyond your means. Your fear of how you look in front of others might result in debt that can get out of hand.
  • Fear of risk: While you don’t want to take irresponsible risks, you shouldn’t shun risk altogether. Some risks are smarter than others. You need to add a little risk in order to be successful, whether it’s investing in a carefully considered ETF or starting your own business.

Don’t Let Fear Rule You

You don’t want to let fear rule your financial decisions. That means that you need to take steps to protect yourself from yourself. In many cases, you can stop fear from taking control by refusing to make quick decisions. Rather than selling everything all at once, ask yourself what’s changed. If the fundamentals of an investment are the same, there is a good chance that it will recover with the rest of the market. Realize, too, that great “insider” opportunities are meant to use fear to push you into making an irrational decision. Think it over carefully. Most legitimate opportunities don’t expire immediately.

Stepping back can also help you avoid making other financial mistakes. Ask yourself why you are doing something. Honestly answer why you want to buy a new car, new shoes or a bigger TV. Learn to be comfortable with your own expenditures and lifestyle, and do your best to stop worrying about other people have. If you focus on what you are grateful to have, you will feel less fear about keeping up with your neighbors.

It can be hard to overcome your fears, even the fear of money. However, if you study your own emotions, and refuse to make financial decisions when fear is the dominating stimulus, you can reduce the number of poor choices you make. Education can help, too. Learn about yourself, and about how money makes. You will feel better about your decisions when they come from knowledge, rather than from fear.


Published or updated May 6, 2011.
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{ 2 comments… read them below or add one }

1 Ross@GoBeRich.com

I completely agree with that last point, that knowledge is a perfect antidote to fear. Fear itself oftentimes stems from not understanding or being educated on a subject, so simply learning can eliminate fear.

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2 Charlie Koch, MBA, CFP®, CFS®

Great article. In my experience investors that become terrified during market declines are invested in a portfolio that is far too aggressive for them. One way to avoid this terror is carefully evaluating who you are as an investor and establish what you realistically expect from your investments. You can then use those guidelines to select a mix of investments that are appropriate for you. Think about it, rarely is anyone afraid of something they planned for. Going forward, manage your investments at set intervals. This will keep you from reacting to a particularly horrifying news story and causing long term damage to your investments. For investors that have a long time horizon, periods of decline and volatility offer the often unrecognized benefit of generally lower prices. This allows investors who contribute on a regular basis to buy “cheap” and lower their average share prices.

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