Combatting the role of fear in investment decisions

Online trading platforms have made the investment world more accessible than it has ever been. Equipped with statistical information on the latest developments in financial markets and the performance of specific instrumentals, even novice traders can make a profit and grow robust investment portfolios. Yet, despite these very real opportunities, traders are often held back or sidetracked by their emotions. Fear in particular, is one of the most notorious stumbling blocks.

This is according to Tickmill Managing Partner, Roger Eskinazi, who explains that fear and greed are widely recognised as the two most prominent emotional setbacks in online trading. “Many traders, regardless of their level of experience fall victim to these emotions and make short-sighted decisions based on deep-seated insecurities and the desire to maximise their earnings, despite the odds.”

The influence of these emotions is so far-reaching that entire indices are based around their impact on financial markets. The CNN Business Fear and Greed Index is one such example – typically, in times when the market is gaining positive momentum, greed tends to take precedence whereas slow market momentum usually lends itself to high levels of fear.

Fear-induced trading decisions come at a cost

Eskinazi says that experiencing some level of fear when the performance of your trading portfolio is in a period of stagnation or a downturn, is a normal human response.

“Fear can arise voluntarily when indicators suggest that you may make a loss. Similarly, traders may experience FOMO, or the ‘fear of missing out,’ when indicators suggest that a particular stock or share is outperforming the rest. However, traders who allow themselves to be over-run by fear rarely achieve their goals in the long-term, and if they do, it’s more likely a result of luck than skill.

“In order to build the staying power you need to become a seasoned investor, you need to put measures in place to ensure that a sense of rationality and calm prevails and that every decision is an informed one, rather than an emotional one.”

A recent study on South African investor behaviour conducted by Momentum, made reference to the notion of ‘behaviour tax,’ or the financial cost or penalty that investors incur due to poor decision-making driven by emotional responses, particularly fear.

This can include fear-induced selling, an attempt to time the markets, avoiding certain investment opportunities and chasing after a feeling of safety during times of volatility. More often than not, these kinds of decisions yield lower investment returns and can sabotage the investor’s potential for realising profits in the long-term.

An expert view on how to counteract fear

An important part of Tickmill’s education efforts involve helping traders to implement counter-measures to combat feelings of fear and make sound trading decisions. Most recently, Tickmill’s Bright Minds podcast hosted Tony Blauer, martial arts and self-defense specialist for a conversation about how to respond when faced with feelings of fear.

In Blauer’s opinion, the best counterforce against fear is self-awareness. Without self-awareness, traders often enter a vicious cycle of feeling fear, acting on it, regretting it and perpetuating this loop indefinitely. Inspired by military training, Blauer suggests making the shift from reacting to contact to pre-acting to contact. Simply put, this involves pre-planning one’s reaction to a specific scenario.

Preparing for fear as a trader

In the world of online trading, fear can arise when there is a dramatic drop in the market, a sudden and unexpected market correction or a major upswing in a share that is not part of your portfolio. To guard against this, traders need to pre-plan their reaction and break free of their knee-jerk emotional and psychological cycles. By understanding the mind and how it responds in moments of fear or panic, investors can manage their stress levels better and regain a sense of inner stability even in environments of outward chaos.

When caught off-guard, traders may instinctively respond with doubt, hesitation, procrastination and overreaction. However, increasing self-awareness also allows traders to recognise when they are wasting time becoming caught up in the fear loop. For Blauer, managing fear in this way means saving time, which is a precious resource.

As Eskinazi concludes: “what traders need to realise is that flight or fight responses to fear are hard-wired into every human brain and need to be accepted for the national responses they are. However, we can avoid making decisions based on fear by planning how we will react when in these kinds of scenarios. Traders need to firstly identify and note down what their fear triggers are, so that when they occur, the trader recognises the feeling and decides on the appropriate course of action rather than just allowing their natural fear circuitry to take over.”