Why Fear is an Investor's Worst Enemy

In investing, risk is often seen only as downside, instead of as a necessary part of achieving higher long-term returns

Morningstar.com 18 September, 2017 | 2:49PM
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Many people underestimate the power of fear in investing. Barry Ritholtz, chairman and CIO of Ritholtz Wealth Management recently pointed out how dangerous fear can be, especially because investors tend to fear the wrong things. This is evident in the public's fear of taking on risk. In investing, risk is often seen only as downside, instead of as a necessary part of achieving higher long-term returns.

Speaking at the 2017 Morningstar ETF Conference, Ritholtz gave multiple examples of humans being controlled by irrational fears. He mentioned the film "Jaws" that came out in 1975. Since its premiere, sharks have been seen as menacing, man-eating predators. Growing up in Rhode Island, Ritholtz even remembers people staying out of the water that summer, out of fear of a shark attack. Although sharks are great predators they are certainly not deserving of this stigma. In fact, more people are killed by trying to take selfies. In the U.S. deer and cows are much more dangerous than sharks.

Ritholtz discussed a similar irrational fear that developed after the 9/11 terrorist attack; people were afraid of flying. This fear didn't come from a well-reasoned look at data, instead it was born from an intense, emotional response to a national disaster. When something as catastrophic as this happens, our emotions can get the better of us and seep into our decision-making process.

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