Human senses and our thinking processes have been honed by millions of years of evolution and an ingrained will to survive. Our body’s thinking machine is immersed in a chemical soup of hormones that can radically alter our perception of the world. Our brains did not evolve to favor long-term investors, our thinking processes evolved with an emphasis on very short-term goals like avoiding predators, finding food, water, shelter and living long enough to reproduce. It’s only in the past few thousand years that wise investing has become a competitive advantage, barely a blip of time on the evolutionary scale and not long enough for our brains to evolve to fit a new financial reality.
So, here we all are, with brains that are almost totally mismatched to long-term investing, living in a financial world that eagerly punishes fearful, emotional investors. Fear of loss is an instinctive reaction that’s hard to fight. What you tend to remember looking back are the times you ignored that instinct and ended up losing money. Loss makes an impression that lasts a long time and it doesn’t even have to be your loss! Anecdotal tales of people close to you losing money can be enough to trigger a fear response in you.
Fear Still Has a Place In Investing
Fear can also be healthy. Fear is, after all, one of our primary survival instincts. Fear kept our ancestors from wading into that river where giant crocodiles lived and what keeps you from walking down dark alleys at night. When it comes to investing, fear can be what drives you to do careful research about a particular stock or investment. The trick to investing becomes channeling fear into something positive but not letting it become the foundation for emotional investing.
A Lot Of Fear Right Now
Right now fear is driving most small investors and I can prove it. 54 million Americans prefer cash as a long term investment over real estate and stock. The group most likely to think cash is an investment are 18-24 year olds, the people who should be invested in stocks. If you’re not retiring in the next twenty years, you should be in stocks.
Stocks Outperform Other Investments
This chart tells the story better than I can. Stocks not only outperform other classes of investments, they trounce them. That’s why it’s important to come up with an investment mix that is appropriate to your age, then periodically rebalance to keep your percentages in line with the level of risk that’s appropriate to your age.
Going By Feelings
Right now there’s a lot of uncertainty in global markets and investors are fleeing to cash. While we may experience a short-term correction, stocks are not terribly overvalued by historical standards. But it feels like it because of the uncertainty in markets. The uncertainty plaguing us now has its roots in corporate debt, the feeling the housing market is too expensive (it is) and the recent vote by Britain to leave the European Union.
If you’re in your 20s, you should own some stock. You should have enough cash to manage an emergency and possibly a couple months off work but you shouldn’t be all in cash right now. An older generation thinks real estate is a good investment right now but home valuations are approaching epic stupidity. Bond values are so bad a few investors are trading them like stocks!
There are no safe investments right now. Anything that’s even relatively safe has been bid down to ridiculous levels. That’s why it’s important to have a plan and to let the plan be your guide, not your emotions and especially not fear. Be in the stock market, diversify your investments and be patient for the next 20 years and you’ll do fine.