Conquer the fear of losing money before fear runs your life.
Fear is crippling and will prevent you from actualizing your dreams. For many people, the pain of losing money is greater than the gain of winning because most humans a loss averse. Loss aversion is a term used to describe people’s tendency to avoid losing to acquiring equivalent gains. Simply put, it is better not to lose Ksh. 10,000, then gain Ksh. 10,000 in an investment. This makes the fear of losing money more powerful psychologically than the satisfaction of gaining money.
Loss aversion being a major factor in financial decision making, and irrational behavior as a result, I felt that it was important to address fear this week. Fear is what is holding most of us back from achieving. Realize, that those who do succeed, don’t succeed because they have no fear but because they decide to face their fears and act.
Where Does Fear Originate From?
Fear is an acquired/learned emotions triggered in three ways:
- Personal Experiences. Personal past experiences can drive you to fear losing money. If you have lost money in the past making an investment that didn’t quite work out for you, then you are more likely to fear to make any future investments.
- Experiences of Others Close to You. Family and friends who may have lost money can pass their fears to you. Through their fear of losing money, you too became fearful as well. This is similar to how children are introduced to fear certain things through observation.
- Herd Mentality. Contagious ‘herd’ mentality, which is basically the thought that since everyone else is afraid then I am too. The fear of snakes or spiders is the most common and most people are simply so afraid.
How the Fear of Money Plays Out
Generally, we are all constantly on the lookout for threats or dangers lurking around us – comparing current experiences with past experiences and deciding if the situation is good or bad. If the situation is bad, fear is triggered in the amygdala (brain center that controls fear and other acute emotions). In this situation, your body tends to freeze up as it builds up hormones designed to save your life. The chemicals built up will either help you to either fight or run, to defend yourself.
When it comes to the fear of money, people to do two things:
- Do nothing and exhibit avoidance i.e. failing to invest or taking too long to make a decision. For instance, the inaction of placing funds in a trading account.
- Excessively engaging and losing out i.e overtrading to lock in small gains and avoid losing money. For instance, buying and selling stocks for a smaller profit because of hearsay.
When afraid, you tend to make hasty decisions which are guided by fear of losing money. Essentially, every time you decide to invest some amount of money, you imagine losing it – then pull back.
How to Conquer Your Fear of Losing Money
Fear can be overcome and here are the ways in which you can learn to overcome fear:
#1 Acknowledge and Define it
Acknowledge that you fear losing money. Try to define where your fear came from and identify where it stems from or how you learned it.
i.e.
| “I am afraid to lose money – afraid of the stock market because my friend lost all his money back in 2008. I think the stock market is very risky. “ |
While you are at it, you can also identify exactly what is motivated by your fear of losing money i.e. comfort, security, control or something else.
Once you do this, you can then…
#2 Identify How Fear Affects Your Investing Habits
How does your fear of losing money affect you? There are two common reactions to loss aversion which are:
- Buying and selling securities for a smaller profit because someone said it was a good investment
- Inaction of placing funds into a trading account i.e. doing nothing or procrastinating.
#3 Develop A Decision Tree
To overcome the fear of losing money, one can look at risky decisions differently. Analyze every possible outcome of the decision, evaluating the best and worst case scenario. In every investment, there are only two forms of decisions: those made out fear of losing money and those made to drive growth.
You can write down your options in a simple decision-making tree like this one:
The probability investing in stocks is 50/50 ergo, a 50% possibility of loss in this decision. The reality is that loss is inevitable. In life, we lose relationships and even situations. This is what makes life meaningful. But life isn’t all tragic and pointless – ‘you win some, and lose some‘. Therefore, loss provides opportunities for gain i.e.more money, new relationships and more. You just have to put yourself out there to experience it.
#3 Take Control
Take the bull by the horns and lead its way. Your life will change dramatically when you ‘learn to conquer fear in spite of yourself’. Take those decisions boldly. The more you engage, the easier it gets.
One thing you can do to help you is to use the board bracketing technique. Broad bracketing is essentially bundling decisions and looking at them in aggregate rather than in isolation. This way, you stop agonizing over one small decision over another and pay attention to the bigger picture – your investment portfolio.
#4 Understand Fear As An Emotion
Fear is induced by perceived danger which elicits a change in behavior such as avoidance. In the case of investing money, loss-averse people tend to avoid placing money in what may be construed as a risky investment. Fear is an emotion just like any other, ergo can be controlled.
#5 Use Fear As A Motivation
Fear of losing money can motivate you to chart progress towards your goal. Fear is a very powerful motivator. Being a primal instinct to keep us alive, you can use fear to make wiser and better decision about your investments. Fear can motivate you to conduct better research and manage investment risk.
Warning: Fear can also be too powerful of a motivator as it can also paralyze – the classic case of deer in the headlight syndrome. You use fear as a motivator, as the solution must be presented with it i.e. conduct painstaking research on all your investments. This way you eliminate doubt and fear at the same time.
Key points to getting unstuck:
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Bottom Line
Finally, the last thing to remember that fear will always have a place in your life and that it is okay to be afraid. What is not okay, is to let fear control you.
Meanwhile, If you enjoyed this, you might also enjoy these posts on making investments: