Is fear holding you back from investing? Many investors are driven by fear, whether it's the fear of losing money or the fear of missing out. But these emotions can lead to poor investment decisions and missed opportunities. In this article, I'll explore why fear is a bad investment strategy and how you can avoid its pitfalls. I'll also offer some advice on how to invest with confidence and build long-term wealth.
The Fear of Losing Money
One of the most common fears that drives investment decisions is the fear of losing money. This fear can be particularly strong when the stock market is near all-time highs, as it is now. Many investors worry that they are buying near a top, and this can lead them to wait for a dip before investing. However, this is often an overblown worry. The S&P 500 hitting all-time highs is not an unusual event, and a J.P. Morgan study found that since 1950, the S&P 500 has hit a new high on about 7% of all trading days. Meanwhile, it never traded lower on about a third of those occasions. This means that if you waited for a dip, most of the time you were left waiting, missing out on solid gains.
The fear of losing money also often occurs when stocks correct or enter a bear market. While the common mantra is to buy the dip, that is often easier said than done when stocks are getting crushed day in and day out. This also causes some investors to sell with the intent to buy later. However, the market's largest gains typically follow its largest down days, and studies have found that investors who miss these big reversals typically greatly underperform the market.
The Fear of Missing Out (FOMO)
Another fear that drives investment decisions is the fear of missing out. When investors see the latest hot stock climbing every day and hear other people talking about all the money they've made, it's not uncommon for some investors to start to chase these stocks. However, over the long term, valuations do matter, and momentum doesn't last forever. Buying hot stocks that have already climbed a lot often leaves late investors with losses, which is why they are sometimes derogatorily called bag holders.
Dollar-Cost Averaging into ETFs
One of the best ways to avoid the trap of emotions affecting your investment decisions is to stick to dollar-cost averaging into index-based exchange-traded funds (ETFs). With dollar-cost averaging, you invest a set amount regularly, regardless of how the market is performing. Over the long term, this will average out your cost basis and set you up to build long-term wealth.
ETFs are the best type of investment to implement this strategy, because they give you an instant portfolio of stocks. Index ETFs, like the Vanguard S&P 500 ETF (VOO) and Invesco QQQ Trust (QQQ), which tracks the Nasdaq-100, are particularly great options with long track records of strong returns. Most individual stocks tend to underperform, but index ETFs do well because they let their winners run.
Personal Perspective
In my opinion, the fear of losing money and the fear of missing out are two of the biggest obstacles to successful investing. These emotions can lead to poor investment decisions and missed opportunities. However, by sticking to a long-term investment strategy like dollar-cost averaging into index ETFs, you can avoid these pitfalls and build a million-dollar portfolio with a lot less worry.
Broader Perspective
From a broader perspective, the fear of losing money and the fear of missing out are two of the most common human emotions that can affect investment decisions. However, by understanding these emotions and how they can impact your investment strategy, you can take steps to avoid their negative effects and build a successful investment portfolio.
