Research shows that our brains are hardwired to avoid loss. This behavioural bias can often drive us to make irrational decisions, especially when it comes to our investments. Lydia Fourie discusses steps you can take to conquer your fear of losing money.
The current economic environment is enough to tempt us to just keep our money under the mattress. There are risks aplenty: With whispers of a global recession and the uncertainty around interest rate hikes, the market doesn’t seem to know what to make of it all. Volatility is the only certainty.
As risky and scary as things may seem, now is probably the worst time to abandon your investment plans due to fear.
Struck by fear, many of us may even identify with the condition ‘chrometophobia’, the term given to the extreme fear of money. On the other side of this coin, the fear of losing money – a well-known behavioural bias – is becoming ever more evident in the behaviour of investors. In a world filled with acronyms, such as FOMO (the fear of missing out), perhaps it can be termed FOLM (the fear of losing money).
Evidence suggests that investing is one of the best ways to build wealth over time, and that keeping money in cash is often riskier because you may not be able to grow your wealth faster than inflation.
Considering the lack of return, storing money ‘under the mattress’ or in a regular bank account is unlikely to provide you with enough protection against rising inflation – history has shown that you need exposure to risk assets, such as shares, to meaningfully beat inflation over the long term. This is because these assets have historically appreciated in value by significantly more than the inflation rate when measured over long investment horizons.
Understanding your investments, and the risks you may face when investing, can go a long way toward helping you successfully navigate trying times and to let go of FOLM.
Where does FOLM come from? Getting to grips with different types of risk
Studies have shown that the pain of losing is twice as strong as the joy of winning. In other words, losing R1 000 hurts twice as much as the same feeling you’d experience gaining R1 000. For this reason, understanding how your investment is likely to behave is key.
One of the biggest risks is behavioural based. This is why it is so important to understand the reasons you are investing and to ensure that your choices are well considered and aligned with your needs and objectives. If an investment performs differently from what you expected, you may be tempted to make changes to it or to withdraw, thereby locking in losses. These knee-jerk reactions may derail your plans.
Another important risk is the danger of overpaying for an investment. We are very concerned about this risk when actively investing our clients’ money, which is why we buy shares we think are undervalued and sell them when we think they have reached their true worth.
What else can you do to let go of FOLM?
Besides understanding the different types of investment risks, the next step is not to let inertia get in the way.
Often, the thought of making the wrong decisions with our hard-earned money triggers a state of analysis paralysis. Our emotions get in the way and can lead to expensive mistakes or overwhelm us to the point of inaction. Overcoming inertia and emotions, like fear, is important to investment decision-making. Of equal importance is to ensure that your unit trust matches your risk profile and that your investment manager’s philosophy resonates with you.
While we encourage a long-term approach to investing, we realise that the experience of investing doesn’t only happen at five- or 10-year intervals – you have to live through the short-term ups and downs and be disciplined enough not to jump ship at the wrong time. This is easier said than done, but keeping the longer-term picture in mind can lead to better long-term outcomes and help you remain invested through any short-term fluctuations.
Lastly, consider consulting an independent financial adviser who can help determine your risk profile and take a holistic look at your finances to recommend the best solution for your specific needs.