Personal Finance Essentials
Fear
Fear is a lack of confidence in the financial markets.
People who don’t like to invest are afraid that a market crash might occur. But most financial fears rest on unrealistic concerns. Creating a complete portfolio management strategy can help you reduce your fears.
What Fear Really Costs You
In one study, students were shown how markets performed over a 25-year period. Those who received roughly 200 market updates allocated only 40% of their portfolios to stocks when asked to build a new portfolio for the next 40 years. Those who received just five updates allocated 75%. The group that watched the market most closely was the least willing to be invested in it. Since stocks have historically outperformed all other major asset classes over long periods, fear of short-term fluctuations carries a direct and measurable long-term cost.
A Real-World Example
One retiree transferred his 401(k) – about $300,000 – into an IRA and placed the money in stock mutual funds. When the market fell during August and September, he grew worried. By early October, he couldn’t take it anymore. He sold all his investments at a loss and moved to a money market fund. By the end of October, the stock market had fully recovered and surpassed its prior level. He locked in permanent losses because fear overwhelmed his long-term strategy.