I have a lot of money fears in my life; perhaps more than most of you:
- My wife just quit her safe job to start a business, resulting in the loss of $40K of annual income and making me the only one with a job.
- The stock market is down and one of my accounts is down about $30K since March.
- I have loans totalling over $1 million, which need payments of about $5,000 per month.
- I’m thinking of retiring from my own job as soon as possible, which would of course result in the loss of all our job-based income.
- I have two young kids who will consume more and more money, not to mention my wife and myself, who would occasionally like a vacation or a nice night out.
Fear is something that seems to grow as age. Kids and teenagers will try anything for dubious payoffs. Leaping off the roof of a house into a kiddie swimming pool sounds like fun. Towing a bike behind the ol’ pickup over a home-made ramp is good entertainment! We’ve seen it on YouTube and it’s hilarious.
Old folks like us are more sensible. More responsible. Right? Wrong! We’ve become more cowardly. We’ve changed how we measure risks. We’ve changed how we imagine things will turn out.
Fear of Loss
Most normal people have a comfortable, if boring life. We grind out a job 10 hours including commute, cook dinner every night, maybe do a little recreation some evenings, have a BBQ on the weekend, spend the rest of our time cleaning or mowing the lawn. Everything we normally do is to add a little bit of comfort to this life. Buy a Wii, get a bigger TV, that kind of thing. Day-to-day, we don’t put anything on the line. There is no risk in our lives. We’re not used to it.
When a decision comes up that might include loss, for example deciding how to invest in your retirement, then the imagination starts working.
I don’t know much about investing. I’m bound to do something wrong and I could lose all my money. So much data; is any of it real? Can it save my portfolio? My friend knows someone who read an article about a dude who lost his home by daytrading. I think there was one guy in England who lost so much money THAT HE BUSTED THE BANK HE WORKED FOR!
Mr. Banker, you say you have a guaranteed return? How much? 4%. Can’t lose any money? It’s called a savings account? I’ll take it.
Are you one of those? I know a few. Practically impossible catastrophic events become well worth preparing for. Unlikely losses are bound to happen someday. Occasional hiccups become the rule of the day. They overweight the value and likelihood of loses to such a degree, and underweight success, that almost nothing is worth it. The only thing they go for is guaranteed returns, or at the very riskiest they throw money at a banker and let him take care of them while they ignore everything like an ostrich with a buried head.
They need an antidote!
Fear inoculation is a term that I’ve come across and like. It is about curing and preventing unhealthy fear that keeps you from success. Below are some tips about how to inoculate yourself from financial fear.
Correctly Counting Losses: The losses most overly conservative investors forget to count are the opportunity costs. These are the fantastic gains that are missed by holding cash or bank accounts; the miraculous power of leverage that is left unexploited; the boundless riches of business and active investing.
Prove to yourself that the loss is greater. When you get your quarterly statement from the bank about how much interest you earned on your cash, do a quick check on what you could have earned. Be honest: You could have figured out how to invest in an index fund right? Or if you already invest in funds then you could figure out how to upgrade to a margin account or buy some real estate. Take that difference and count it as a loss.
Internal Conservative Investor Dialog: Let’s have a look at my ING 4% Super Duper Savings Summary and find out that my $10,000 balance made me this quarter. $100! Wholly cow! I just made 5 hours worth of wages with all my investing strategies. Why am I so brilliant and unbelievably amazing? Did my parents teach me or have I just been gifted from God?
My Internal Dialog: Jeez. $100 on $10,000. Stock market went up 3% so I could have made $300 in an index. If I had borrowed to invest I could have easily made $600 in the market. In reality my failure to use other easy options cost me at least $200 to $500 or 200-500%!
School Yourself: Some people are deathly afraid of getting AIDS. They might get it from looking at an infected person. Those in the know are not afraid unless they’re thinking of exchanging body fluids. Some tribes are said to be afraid of cameras because they capture the soul. Those in the know are not afraid because they know that a camera captures reflected light.
The more you know the better you are able to judge the outcomes and the less fatal they become. Personal finance information is so abundant that you really have to dodge well to not get some of it on your jacket when you go out. You could start with some of the entries on my blogroll, they’re decent. Or pick up one of the classics from the library: The Richest Man in Babylon or The Wealthy Barber or one of the continuous stream from Suze Orman, Dave Ramsey or David Bach.
Just DO IT Before You Imagine It: The imagination is a great thing. It is so powerful that athletes use imagination, or visualisation, as a substitute for practice. In their minds they can hit the perfect baseball or play the perfect tennis match, with results nearly as good as real practice. The imagined becomes the actual.
What do you think happens when you imagine bad things? You are making them more real too! The fear is certainly real. When athletes imagine, they are simulating something as realistically as possible for their own benefit. When some others imagine things they’ve never tried, they make up terrible outcomes that do not benefit them.
So stop it! Try substituting actually reality for your imagined reality. You’ll immediately see that you both win and lose, and loss is not as catastrophic as in your dreams. The real world will be more pleasant, and you also have the opportunity to improve. Then, based on your experiences, you can daydream about success and riches instead of devastation.
Familiarity is THE BEST way to get rid of fear. You’re not afraid of the stairs in your house are you? That’s because you know how to walk and climb them; but at one time you didn’t. When you were a baby you fell down nearly every time you tried to stand. Right now you would never try to climb those stairs if you were afraid of tumbling down. But you do because you know exactly how to climb them and it’s just so easy. Most everything is like that. The first time is scary, but then you know how it works.
What’s the Worst That Could Happen?: Imagine very specifically some of the most devastating things that could happen with whatever financial decision you make. Usually there is one: A big loss of investment. You put in $1,000 in a mutual fund and it goes to zero. Can you handle losing the $1,000 on the slim chance that it disappears? If so, then you have the ability to try.
By the way, total loss is usually impossible. For a run-of-the-mill mutual fund to go to zero it literally has to have all the companies it holds go bankrupt, which would basically mean that a whole economy, or a whole sector, went bankrupt. Not possible. So imagine a loss of say 50% as being the absolute worst for an investment like that. Make it real, don’t just pretend “If I invest $1,000 then a plague might be unleashed upon my heirs.” If you really don’t know then figure it out!
There is so much more to say about developing positive drive, mental toughness, and optimism but that’s enough for now. The basic message is to understand that your fears are mostly imagined, and mostly over-stated. Get back to reality and use imagination to your benefit.
Back to the fears I started with. They sometimes feel like huge weights, and they’re not even imagined. They’re real! Financial gurus talk about latte factors and saving $2/day when I just lost 15,000 times that much in the stock market! I must be drowning!
Not at all. Those losses are staggering, but I counter them by tallying my real and imagined successes.
- My wife’s job was not helping her be happy, and life is more about happiness than grind. We’ve analysed her business idea and believe that even within the first year she will be able to generate as much take-home money with less and more rewarding work. It will still be a job of sorts, but she hopes it will be a happier one.
- That $30K stock loss was $30K higher just 6 months ago, and I believe the choice of investments is good. The account has tripled the growth rate of the index for the past 3 years and even with the loss, it is still at the level that I ended last year at. I could be doing a lot worse. I rejoiced in the boom quarters so I have to take my lumps bravely.
- The $1M in loans are invested and generate $7,500 in revenue each month on average. Therefore I gain $2,500 per month. I just have to believe that the strategy is good.
- Quitting my job might be a boon. This year, for the first time ever I hope to make more money from my side investments than from my job, and I only spend about 5% or 10% of my time on those. If I spent more time that could easily mean better returns.
- We have the same number of mouths to feed as most families and we’re probably doing better so if they can have a great time doing it, so can I. It’s a pleasure