Keith Schwanz

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This article was written on 30 Sep 2008, and is filed under Personal Finance.

Fear in Uncertain Times

The gasoline nozzle failed to automatically shut off. Fortunately, I stood nearby and quickly clicked the trigger. Unfortunately, I stood nearby and had petroleum splatters on my dress pants and shoes. With the price of gas these days, I sure don’t want to pay for spills, too.

The price of milk has increased. To buy the kind of milk my lactose-intolerant body can handle, costs more than $4—a half gallon. There would be crying over spilled milk in my house.

I have pastor friends stuck in the housing market collapse. Neither one of them ever dreamed they would end up with a “short sale,” getting rid of their houses for less than they owed the mortgage company.

When recent investment statements arrived, I cringed to see the “change in investment value” as a negative number. The calculator bears bad news: the value of our investment accounts are down 12.5 percent in spite of regular deposits. Will the target date for retirement hold?

Others seem to feel financial stress, too. Anecdotes suggest that giving to churches has decreased. Non-profit organizations report the same number of contributors, but smaller contributions.

The media pours fuel on the smoldering fear fire. The U.S. dollar has declined. Financial news analysts debate whether the country has already slipped into recession. I’m not sure what all that means, but it can’t be good. Before long, the anxiety meter pegs in the danger zone.

Behavioral finance scholars look at the psychology of financial decisions. The MarketPsych Fear Index counts the references to investor fear in the U.S. financial news. It’s been up for the last three months. People refer to the Chicago Board Options Exchange Volatility Index (VIX) as the “investor fear gauge.”

Feel the Fear

Fear during times of financial uncertainty can overwhelm a person. Some become disoriented and make unwise decisions. If the confusion cycle speeds up, panic can result. The fear will intensify, especially if the person doesn’t understand how to navigate the financial world.

For short-term, cash flow matters, times of financial uncertainty can motivate a financial checkup. Do you have any problem with debt? Is there enough in the emergency fund? The financial margin of three to six months of living expenses in reserve softens the feelings of insecurity.

Stick with your plan for long-term goals even in tough economic times when it doesn’t feel good to do so. Even the most highly qualified financial advisors cannot predict the top or bottom of the financial market swings, and you can’t either, so continue to invest regularly.

Take appropriate risk, even when feeling uncertain. I’ve known people who moved money to “safe” investments when fear increased. A money market fund, for example, could be that “safe” investment, until you consider that the latest inflation rate is about double what a money market fund pays right now. Moving all investments to cash may feel like the correct decision, but in reality it doesn’t preserve buying power. I have talked with several people who have not taken enough investment risk with their retirement accounts, even though they may have decades until retirement. The longer the time horizon, the greater the investment risk that can be taken.

But you don’t want to take too much risk, either. In times of economic downturn, when the typical investments don’t seem to be adequate, financial “gurus” fill television shows with “sure thing” investment ideas. A person who chases the next big idea usually will end up with less financial security.

Increase your confidence in personal finance during challenging times by learning more about how the financial markets work. Markets cycle through highs and lows. This low isn’t the end of the world; it’s happened before and will happen again. “Up” markets typically last twice as long as down markets. Learn to be a contrarian investor; if everyone is screaming “sell,” it may be the bottom of the cycle and the best time to make that monthly contribution. You won’t make that kind of decision, however, if fear controls your actions.

“Fire in the heart, ice on the brain”—I first heard that phrase in an orchestral conducting class. The professor urged us to bring out the emotion latent in the musical score, but not to let zeal create chaos of the music’s mechanics. In the same way, don’t let emotion interfere with clear thinking about personal finance. If emotion incites irrational choices, long-term damage may result. Feel the fear, but keep cool when making financial decisions.

Originally published by Pensions & Benefits USA.

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