When making decisions about your finances, you can’t let fear rule you.
One of the unfortunate truths about human behavior (and behavioral finance) is that fear has a big impact on what you do. Fear drives us to make decisions on many subjects, from where we live to how we behave toward others to what we do with our finances.
The problem with fear is that it often clouds judgment. When you let fear rule your decisions, you are much more likely to make poor decisions. This holds true with finances as well as for other things. When you make financial decisions while holding on to fear, you could run into real problems.
Investing and Fear
Fear impairs your ability to make sound financial decisions, and this is rarely as evident as with investing. Short-term markets are volatile. Long-term, though, they tend to even out and gain. If you look at a trend line over a period of a couple of decades, it looks much smoother — and it points to gains — than if you look at a trend line over the course of a year.
Instead of listening to the doom and gloom that pervades the next few months, or even what you think will pervade the next few years, you need to do what Mike Piper at Oblivious Investor suggests and ignore the noise. Instead of freaking out and listening to the noise we hear in the financial media, he suggests that you keep calm, invest in index funds, and carry on.
When you make investing decisions based on fear, panicking over what will happen in the next few months and freaking out over who happens to be president, you are more inclined to sell low — after you’ve bought high. In the long run, things are likely to work out, and fear only magnifies the swings in the market.
Other Financial Decisions and Fear
It’s not just investing, though. Basing other financial decisions on fear can be equally detrimental. Are you so afraid of what’s next, whether it’s a fiscal cliff or something else, that you are abandoning your usual financial plan in favor of hoarding gold coins or breaking the bank and getting into debt to buy extra guns and ammo, you might run into other problems.
Of course, fear doesn’t have to be quite that way. Sometimes, fear of not being like your neighbors drives you into deeper debt as you try to keep up with what you “should” have. And the fear that you are “missing out” on something can also cause problems. Fear can also lead to panicked (and expensive) decisions about health care, buying a home, or purchasing a car. Anytime you let fear drive you into making a quick decision, you put your finances at risk.
Dealing with the Fear
Instead of giving in to fear, consider how you can prepare for financial emergencies, be they of a more personal finance nature, or an economic nature. One of the best ways to beat fear is to have a plan, and to be ready. While this might mean coin hoarding as part of your plan for a more diversified portfolio, other steps can also help.
Build an emergency fund to help you prepare. You can also boost your emergency preparedness. Whether you lose your job, or the economy really does collapse, emergency supplies (including home food storage) can help you be ready. And knowing that you are ready can help you keep the fear at bay and allow you to focus on making better financial decisions for today, and for the future. A bit of optimism can help, too.
There is a lot of uncertainty out there. But that doesn’t mean that you have to give in to fear. It doesn’t mean that you have to let fear rule your life and your finances. There are always opportunities to be found in any situation, but if you let fear cloud your judgment, you might not see them.