The Motley Fool

Don’t Let Fear And Uncertainty Cloud Your Judgement

With the news and media outlets constantly blaring out bad news on lingering uncertainties and financial turmoil, investors would probably be filled with a dark sense of foreboding as we enter 2019.

It’s important to emphasise here that while it is crucial to keep up with business news to understand what’s going on in the world around us, it’s also equally important to insulate ourselves from negative emotions. Pessimism is a condition which makes valuations attractive, but it may have a harmful effect on an investor’s psychology and cause him to make unwanted errors.

In this article, I will look at two common emotions which afflict investors – fear and uncertainty.

Fear – Of Losses And Of Losing Out

Fear is a very common emotion when it comes to investing, and can manifest itself in two distinct but opposing ways.

One is where the investor fears growing losses as one of his investments plummets in price, which makes him sell and lock in a loss amid growing panic. The other is what is known as “Fear Of Missing Out” or “FOMO”, which is the tendency for investors to jump in to chase a rapidly appreciating stock so that they do not miss out on future gains. Both of these instances display a lack of logical, rational thinking and are therefore not encouraged.

Uncertainty And How To Manage It

It has been said that the only certain thing in this world is the presence of uncertainty. Investors have to realise that uncertainty is an inherent characteristic of stock markets and of investing, and that uncertainty itself is not a bad thing. As with risk, the key is to manage uncertainty well rather than to avoid it. The problem I find is that many investors shy away from companies due to uncertainty over revenue growth, earnings, dividends or prospects. Shunning companies based on this may cause many investors to miss out on good investment opportunities to grow their wealth.

Making A Rational Judgment Call

As can be seen above, fear and uncertainty work to cloud investors’ good judgement and may cause them to take actions which are detrimental to their wealth. In order to ensure our investment ideas are robust, we need to remain rational and sensible so that the right judgement calls can be made.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice.