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How Fear May Be Hurting Your Investment Strategy

March 31, 2015
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By Chad Smith

Learn more about Chad on NerdWallet’s Ask an Advisor

Maybe you’ve heard people express fearful thoughts about how and when to invest. Maybe you’ve even expressed some of these thoughts yourself:

“I know we are holding too much cash but we’re waiting for a dip in the markets to invest.”

“I’m upset that my portfolio didn’t do as well as the S&P 500 last year. I’m not sure my current strategy is the right one.”

“I’m no longer contributing to my portfolio because I can’t afford to lose any money.”

We are drawn to stories of people overcoming, advancing or succeeding in unique ways. But too often our fear keeps us from living these success stories.

Taking inventory of where you are, optimizing your future strategy and implementing a diligent review process is a great way to tweak some of the fearful behaviors that can hold us back.

How fear can derail our stories

We all have instincts that pull us in the opposite direction from what we should do with our money. But it’s difficult to change the hardwired stories we’ve always told ourselves.

Stories of how we can’t go through another 50% market decline. Or stories about how we should have invested more in 2002 or 2009 but were too nervous about losing more than we already had.

The most memorable stories are generally punctuated with experiences of lost money from an old investment.

Even in a rising stock market, this can have a profound influence on how we make decisions with our savings going forward.

Waiting for a drop

Recently, many people have found themselves struggling with the idea of investing a lump sum of cash savings while markets are at all-time highs. But for stocks to rise over time, by definition they have to keep setting new highs for a certain period. Josh Brown of The Reformed Broker blog, points out that the S&P 500 Index saw 53 new all-time highs in 2014.

There are also studies that have found that you’re much better off investing a lump sum vs. dollar cost averaging if you have the choice.

Our disconnect lies in the stories we’ve heard from others or our own experiences after past market drops, when panic won. These feelings paralyze us from investing anything at all. If markets continue to rise, we continue to wait for a drop. If markets begin to fall, we want to wait until things “look better.”

But it’s impossible to participate in the upside without also having times when values decline. So our fear of losses prevents our long-term story from changing.

Instead, our goal should be to rewrite the stories our emotions have led us to believe for so long.

What story are you living?

One of the most fulfilling things we experience as financial advisors is helping clients avoid their emotional impulses. By talking through scenarios and planning for contingencies, the emotional influence wanes and they begin to live different stories.

These stories can show that money is about more than just numbers. Your financial story actually is behind the purpose to your life. It gives you the confidence to make decisions that have a lasting impact in your life and the lives of those you care about most.

The value of your story is in how it shapes you, how you learn from it and, in turn, how you grow from it.

So what is your financial story? Are you satisfied with how it’s unfolding? Are you moving in the direction you desire?