Fear is one of the most powerful emotions we experience. It can lead to irrational decisions, especially in investing. The financial industry knows this all too well, and fear-based sales tactics have long been used to prey on investors' insecurities.
Robert Seawright, a California-based financial adviser, touched on this issue in 2018, noting that “When the markets are roiling, fear is pitched all day, every day, and human nature buys it. And pays a premium. A very big premium.” Simply put, fear-based messaging is a profitable industry. As Daniel Gardner writes in The Science of Fear, “The countless companies and consultants in the business of protecting the fearful from whatever they may fear know it only too well. The more fear, the better the sales.”
So, how can investors protect themselves from the noise, the sales pressure, and their own worst instincts?
Step One: Don’t Feed the Fear
Greg Davies, a behavioral finance expert, was once asked live on Bloomberg what investors should do if they’re worried about market volatility. His response? “They should stop watching Bloomberg for a start.” Financial news outlets often frame normal market cycles in alarmist terms, creating stress and stirring emotions that can cloud good judgment.
During volatile times, consider cutting back on your media consumption or turning off alerts altogether. Focus instead on what you can control: your long-term plan.
Step Two: Prepare for Volatility, and Then Stay the Course
At WealthFactor, we know that market downturns are inevitable, and there’s no telling when they will occur. The key is not to panic but to have a plan that anticipates such events and provides you with a clear course of action. As Mike Tyson once put it, “Everyone has a plan until they get punched in the face.” In the world of investing, these “punches” are the market drops that can make it difficult to stick with a plan.
A well-designed, evidence-based investment plan considers market history and builds in resilience. As Dimensional Fund Advisors’ Jake DeKinder explains, staying disciplined is vital: “While these events might seem frightening in the moment, they are not necessarily unique or unusual. Throughout history, capital markets have rewarded investors who are able to stay disciplined. After many major events, financial markets have recovered and delivered positive returns.”
Lessons from Past Market Events
When markets decline, it’s easy to let fear take the reins and make decisions based on the assumption that things will keep getting worse. However, history has consistently shown that markets are resilient and that those who stay invested in down markets are often rewarded as conditions stabilize and recover.
Let’s look at how a 60% equity/40% bond portfolio responded following six major market downturns in recent history. The data shows a pattern: investors who stayed invested saw positive returns over one, three, and five years following these declines. Those who bailed out or tried to time the market, by contrast, often faced missed gains, higher transaction costs, and, in some cases, realized losses.
Tune Out the Noise and Focus on What You Control
As Jake DeKinder emphasizes, “Over the long term, investors who have been able to remain patient and tune out the short-term noise surrounding these events have been rewarded for doing so. In the face of uncertainty, it’s important to remember this historical perspective and focus on the things we can control, rather than the things we can’t.”
By focusing on what you can control — your goals, your asset allocation, and minimizing fees and taxes — you create a plan that is far more likely to deliver over the long term than one built on reacting to daily market news.
When in Doubt, Get Fiduciary Advice
If you find yourself questioning your investment strategy, it’s wise to consult a fiduciary adviser. A registered investment adviser with a fiduciary obligation will prioritize your interests over generating commissions. At WealthFactor, we help our clients create and stick to evidence-based plans that take emotion out of investing, helping to protect their long-term wealth from short-term panic.
As investors, we don’t have to follow the crowd. Instead, by tuning out the noise, thinking long-term, and ignoring what’s outside our control, we can stay focused on the financial future we’re working to build.
Fear may sell, but discipline pays.
Recent Insights
