Boomers, Markets & Money

A Down-to-Earth Discussion of Financial and Lifestyle Information for Baby Boomers


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What is Stopping Me From Investing my Money??

Investing Anxiety

Investing Anxiety

My friend Ann said, “What I want to know is: What is stopping me from investing my money?”

Ann is not alone. A Nationwide Financial survey found that more people are afraid of investing in the stock market (62%), than are afraid of death (58%), or public speaking (57%.)

Daniel Kahneman, psychologist and winner of the Nobel Prize in Economics, gave advice on this topic in his book Thinking, Fast and Slow. Kahneman gave this sermon to fictional character Sam:

“I sympathize with your aversion to losing any gamble, but it is costing you a lot of money.”

Kahneman advised, “You will do yourself a large financial favor if you are able to see each of these gambles as part of a bundle of small gambles and rehearse the mantra that will get you significantly closer to economic rationality: you win a few, you lose a few. The main purpose of the mantra is to control your emotional response when you do lose.”

The author did not condone reckless gambling. He had three limits on his “win a few, lose a few mantra.”

  • Diversify. The gambles have to be independent of each other. “…it does not apply to multiple investments in the same industry, which would all go bad together.”
  • Don’t bet the farm.  The gamble should be small enough so you are not worried about a significant loss to your wealth. “If you would take the loss as significant bad news about your economic future, watch it!”
  • No long shots.  This mantra doesn’t apply to long shots which he described as “the probability of winning is very small for each bet.”

Kahneman said you have to have emotional discipline to follow the above rules. But his main point is that you should see each decision as one of many small decisions in a portfolio.  Emotional distress can also be reduced by cutting back on how often you check how your investments are doing.

Related Blog Posts

“How to Handle Emotions When Making Investment Decisions”

“When to Trust Your Intuition or Gut Instinct When Making Financial Decisions”

“How the Heck Do I Invest my Money?”

Sources

“Nationwide Financial Survey Finds Fear of the Markets Trumps Fear of Death”

“Thinking, Fast and Slow” by Daniel Kahneman, pages 338-339


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How to Handle Emotions When Making Investment Decisions

We all struggle with emotions regarding money. Making major investment decisions without safeguards during periods of extreme emotion can work against us both in down and up markets.

I saw a helpful interview on Bloomberg TV this week. Greg Davies, Barclay’s head of Behavioral Finance, offered some tips on how to make better decisions when you feel your anxiety spike.

  • Develop habits over the years that you use regularly. A well-thought-out routine will help you make sound decisions when events rattle the markets. So, at a time when the markets are calm and you feel coolheaded, write down what you should do. Read it when you feel anxious. He said it is critical not to wait until the last minute when you are in a very stressful situation. A checklist can be one way to organize your plan.

    Milo contemplating his next move...

    Sleep overnight on major investment decisions. (Click to Enlarge)

  • Have a cooling down mechanism planned. Davies suggested planning on sleeping overnight on a decision to make a major change in yourinvestment portfolio. Or you could have a plan to talk to a trusted friend or financial advisor before acting on a major revision.

We’re all familiar with those uncomfortable feelings that pop up during major market declines. But emotions can work to an investor’s detriment during stock market upswings, too.

I can’t help wondering if a little stock market euphoria is developing now. I saw four commentators make optimistic comments about the stock market during a segment on CNBC this week. Ralph Acompora exclaimed, “I’m so excited! We have years left!” When I heard that, I felt really uneasy.

I had visions of CNBC anchors putting on Dow 10,000 hats the first time that level was hit. (For your amusement, I have included a link below to a pictorial of the Dow 10,000 hat.) Investors can feel pressure that they are missing out on a rally and buy in at market peaks.

As Warren Buffet said, “You try to be greedy when others are fearful and you try to be very fearful when others are greedy.”

Sources

“Old Hat: Dow 10000, a History in Headwear” by Matt Phillips. The Wall Street Journal

“How to Overcome Emotional Responses in Investing”   Bloomberg Television Video.