Fear of Losing Money

If you don't manage your fear of losing money in your investing accounts, you are setting yourself up to lose coming and going:  entering late, holding onto losing positions too long, and getting out of winning positions too early.

Wait a minute!  Isn't the old saying that the market runs on fear and greed?  Why the emphasis on fear and not greed?  I've left out greed here for a few reasons

  • neither one of them is particularly helpful in crafting a successful long term investing program
  • brain imaging is bringing solid evidence that avoiding loss is a much stronger drive than achieving a reward
  • greed may actually be an attempt to avoid a perceived future risk by amassing a margin of safety
  • or as, a fear of being left out, of not being smart, of "leaving money on the table"

Fear of losing makes people wait too long to enter good investments

The whole idea is that you want to buy low and sell high, cut losses quickly and let profits run, but surveys of brokerage accounts suggest that many (most?) individual investors do just the opposite.

Very successful investors are often credited with buying assets "when there's blood in the streets" and holding them until "everyone" is sure that they will continue to go up forever.  If their systems call for holding the position, that's what they do, no matter what "everyone" knows.  Take a look at this article about John W. Henry and his trading discipline.  He's famous among traders for sticking with his trading plan. (Yes, that's the same John W. Henry who owns the Boston Red Sox baseball team.  He traded commodities before he started trading ball players.)

It also is at the root of holding onto losing positions too long.

Have you ever heard someone say that the haven't lost money until they actually sell?  Until they actually close the position they call it just a "paper loss".  Hoping upon hope, they hold onto it so that it will have a chance to come back.  Very often those kinds of situations never do come back.  Even when they do, if you haven't dealt with your fear of losing in the mean time, you are very likely to sell when you get back to even.  Why?  Because you are afraid that it will drop back into the red again.

What can you do about it?

An effective program to cope with the natural fear of losing will be different for each person, but you might consider some of the following:

  • Remember that it is natural.  Though everyone experiences it in different ways and to different degrees, it's in the way we the way humans are wired.
  • Learn to notice how you are feeling in your body as you make investing decisions
  • Learn mental focus, calming skills to lower levels of anxious arousal
  • Plan on what you're going to do when you experience it, . . . not if.
  • Have a written investing plan.
  • Use diversification of investments.
  • Determine how much you are going to risk on each position.
  • When you enter a position, know where you are going to decide that you weren't right about where this one was going and get out.

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