On my travels to Indonesia over the past month I had the chance to read The Jakarta Post, the major daily published in English. On a couple of Sundays Colin Bloodworth contributed articles about the traps of greed and fear when investing. I particularly found his analysis of the 'Fear Factor' well worth the read. The edition on the 23rd of December discussed the damaging impact of irrational fear when it comes to investment decisions. This topic seems particularly relevant given the turbulent times on investment markets all over the world.
Colin made a sound point that fear is actually a natural defence mechanism that prevents us from harming ourselves. However irrational fear is what we need to avoid in investment markets. Some examples of fear he pointed to were:
- Fear of Being Left Behind
- We as investors fear being left behind while other investors take advantage of the latest hot offering. The tech boom of the late 90s is an example of this. Some investors who invested early in this boom made a lot of money. But those who waited until the fear of being left out was too much jumped on just before the bubble burst.
- Fear of the Unknown
- This fear stops investors from placing their money in the best possible situation because they do not know or understand particular investments. For instance those who keep their savings stashed away in cash or even a particular currency, or only invest in property because they do not understand alternative investments.
- Fear of Stock markets
- Not only do investors fear stock markets because they do not understand them, they particularly fear the volatility. This fear leads to investors making timing calls that hurts their returns through buying when prices are high and selling when prices are low. This is based on the fear of missing out (buying at highs) and the fear of losing more money (selling at lows).
Colin concludes his article by suggesting that these irrational fears can be overcome. The first step is to face the fear and better understand the 'beast' you are confronting. Secondly don't expect that you will have plain sailing all the way through your investment life. Rather learn from the mistakes that are made to be better prepared for the future.
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