Stock Investors: You Have Nothing to Fear but Fear Itself

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This article is Part 1 of a 3-part series discussing how investors can avoid acting irrationally. Read Part 2 and Part 3.

The stock market is not your friend. You want to approach it the same way the American president should approach a one-on-one meeting with the Russian president: Be respectful but cautious. He might smile at you and say all the right things, but despite the diplomatic niceties, your interests might not be aligned.

The stock market awakens a dangerous emotion: fear. It is sitting dormant in us all, awaiting an excuse to wake up. When stocks are going up, we may find ourselves engulfed in the fear of missing out (which is so predominant in our society that we even have an acronym for it – FOMO). When we are consumed by FOMO our time horizon magically expands. We tell ourselves we are long-term investors and our risk tolerance is infinite. Risk of decline? We puff out our chests and say “bring it on!”

And then when the market actually declines, a very different fear pays us a visit–the fear of loss. The invincible hero who conquered the FOMO moment shrivels to a husk of his former self when the fear of loss emerges. The chest collapses, and so does the time horizon, shrinking from “years and years” to months, days, or minutes.