When I first started investing about a decade ago, I remember answering a long questionnaire from my insurance agent. One particular question which stuck out was about my risk tolerance towards share market corrections. Lacking in investing mileage back then, I simply ticked off “20% losses” as what I felt I could handle. And with that, I plonked some money into an equity fund, and hoped for the best. Perhaps, I could have prayed a little harder. But it was not to be. Little would I know that the very first time my fund fell by just 10%, I would…
When I first started investing about a decade ago, I remember answering a long questionnaire from my insurance agent.
One particular question which stuck out was about my risk tolerance towards share market corrections. Lacking in investing mileage back then, I simply ticked off “20% losses” as what I felt I could handle. And with that, I plonked some money into an equity fund, and hoped for the best.
Perhaps, I could have prayed a little harder. But it was not to be.
Little would I know that the very first time my fund fell by just 10%, I would freak out and hastily sell my fund. It was then that I realized that I had no clue on how I would behave under adverse share market conditions when I answered the questionnaire.
Fear is not a new emotion
Later on, I discovered that my reaction – fear of losses – was not new. In fact, it was a rather typical reaction for a vast majority of people. This behaviour was covered in Jason Zweig’s book “Your Money and Your Brain”. Mr. Zweig is an award winning financial columnist for the Wall Street Journal. In his book, he noted down several traits of fear (emphasis mine):
“Being part of a larger group of investors can make you feel safer when everything is going great. When the market is flat or rising, your sense of fear may go into deep hibernation. But believing that you are fearless is very different from being fearless.
One burst of bad news, and the support group can become a stampede. You will suddenly be all alone, just when nothing feels safe anymore.
Current social pressures – plus centuries of tradition — lead us to equate money with safety and comfort. (Ironically, we even call stocks, bonds, and other investments “securities”). So, a financial loss or shortfall is a painful punishment that arouses an almost primal fear.”
In other words, when the share market is humming along with investors piling on more money, we may be lulled into thinking that we would be fearless in handling any future gyrations in the share market.
Our comfort level may come from the presence of people around us who are investing alongside ourselves. However, as it is often the case – when the reality of market crashes hits home – the same people around us may retreat en masse. Under such peer pressure, it is not as easy to overcome the feeling of fear, and to turn around and buy shares during market downturns.
The fear of money loss is primal, as money is considered sustenance to life.
Dealing with fear
The first step to dealing with fear is to identify our own pain thresholds, and to be highly aware of our own behavior during share market gyrations. To do that, keeping a journal to record our thoughts during various share market conditions may be the first step in helping ourselves come to terms with our own unique behavior.
Noting down the levels of the SPDR STI ETF (SGX: ES3) – a proxy for the market barometer, the Straits Times Index (SGX: ^STI) – as you write down your own thoughts on investing will give you the context you need to better understand your own emotions when you reference your journal for future study.
An example of a journal entry: note down the SPDR STI ETF level ($3.33 at the time of writing — 12 November 2014), and record down the possible fear that the market is racing to another new high — and hence, another correction. It would be fun to come back a year from now and see whether our fears were justified or not. (hint: it’s probably not, when you are focused on the long term).
Foolish take away
My US colleague Morgan Housel may have summarized it best by saying:
“The vast majority of people overestimate their willingness to take risk. Fear is a strong emotion and often plays a much greater role in decision making than logic.”
With my investing mileage now coming close to ten years, I am happy to report that I have a better handle on managing my fear of investing during market downturns. It follows that when I was able to identify my own tendencies, I could begin to design guidelines around these unique fears to minimize their pernicious effects. In other words, the share market is not a scary place for me anymore.
So, give it a try – and be sure to share on what you have learn.
The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chin Hui Leong doesn’t own shares in any companies mentioned.