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We always want what we don’t have

01 April 2019

2.5 minute read

Fear of loss and fear of missing out leave us in a perpetual state of wanting to be the other person. The trick is to use fear to make you do something actually useful.

Who's this for? Confident investors

What you’ll learn:

  • What is the ‘peak-end’ rule?
  • Why the ‘recency effect’ is so important
  • How to overcome ‘fear of loss’ and ‘fear of missing out’

While the latest development in the Brexit saga perhaps brings us a step closer to its long-anticipated conclusion, to the most part, it fails to allay fears over what the future holds. This fear of the unknown is unnerving, not least because it is often our fears that rule our actions.

Fear of loss and fear of missing out leave us in a perpetual state of wanting to be the other person. We never get to be ‘that person’ because we either regret being unable to get ourselves to act in the first place or, if we did, we now feel slighted something we had has been taken away from us.

Fear of loss leads many people to take inadequate risk with their investments, to the extent many never get invested at all, even when their circumstances and long-term aims suggest that they should. Instead, they spend decades shuffling around with all their savings in cash.

The ‘recency effect’ means we tend to focus on things that have happened within the past year or so, when making decisions (bar situations that were exceptionally emotive, such as the global financial crisis). This bias towards recent events doesn’t make for being very good long-term investors.

Plus, within that year, we tend to only recall moments of extreme: peaks and troughs. We demonstrate sensitivity to peaks to such an extent the effect even gets a name: the ‘Peak-end rule’. Peaks then become points beyond which we regret not cashing out. We have, of course, already conveniently forgotten how investing in the market carried us to the peak.

And, unfortunately, you won’t spot the nearest peak until you’re past it.

Sometimes we use familiarity to get over this fear. Starting out by buying a few stocks in companies that are familiar in some way is really common. Often, it’s companies that we’ve worked for, or well-known brands. If this gets you into investing and you can afford to lose it then it’s a positive step in the right direction: consider it excellent training. If this is how you’ve invested, then the next step is ironically to take some risk out of your portfolio by adding some lesser known holdings.

However, doing so doesn’t feel comfortable and it actually feels riskier. We like things we know: when did you last order a new pizza topping? But if you’d never tried anything new you’d still be eating only purees and carrot sticks. What buying other stuff does is help get you into the general market which is less dependent on the few – one chief executive‘s decision-making, one major product staying market leading, one local weather system – one-offs. Why be hostage to one-offs?

An easier way of adding diversification to your investment portfolio, and helping to reduce the overall risk, is to buy a fund, rather than shares in individual companies. A fund enables you to own shares in lots of companies, with minimal effort: buy a small number of funds and in turn they buy truckloads of things for you. Delegation of effort.

This gets you out of the hostage situation, or if you haven’t entered it already, puts you in a good place from the very start. Make that fund a nice diversified multi-asset fund, keep watering that seed with some regular savings into that or another multi-asset fund, and lo and behold you are in a sensible position.

Whilst fear of loss can paralyse action, fear of missing out makes us look longingly over the neighbour’s fence and kick ourselves as to why their grass is so very green and free of moss. The trick is this: use fear to make yourself do something actually useful.

Perhaps a fear of missing out will be the emotional impetus for all political parties to agree on what the eventual Brexit path will be.

These are our current opinions but the future, as ever, is uncertain and outcomes may differ.

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