Why Investors Should Steer Clear of the Fear Trap in Financial Planning

Have you ever heard a quote that just sticks with you?

A couple of weeks ago, I came across this line from the poet Rumi:

“Don’t move the way fear makes you move.”

It’s been with me ever since. And I think the reason it resonated so much is that it really captures this moment in time, where fear is a very real factor in our financial landscape.

Today I want to share some thoughts about the different paths that lay ahead of us — the one paved in fear, and the one paved in fortitude – and which is most likely to lead to the best possible financial future.

How is fear telling us to move right now?

Ironically, since October of last year, the market has experienced a significant upturn of more than 20%1. So why don’t we feel any better? Why is the siren song of fear telling us to jump ship still so persuasive?

There are a couple of reasons:

  1. 2022 was hard. Really, really hard. It’s tough to feel hopeful or confident after having endured so much stress and difficulty over a prolonged period of time.
  2. It’s also hard to trust the upturn. When you’re shell-shocked, it’s human nature to keep your guard up as you wait for the proverbial other shoe to drop.
  3. The headlines don’t help. Much of the recent financial news cycle has been dominated by the specter of Congress not being able to approve a debt ceiling increase — which could have led to an unprecedented default of U.S. Treasury securities. This potential crisis was resolved in early June, but the next big fear on the horizon is a looming recession.

With the residual panic of 2022 making it difficult to trust more recent gains, and the financial news cycle always ready to prime us for the next apocalypse, fear’s direction is clear: get out now, while the getting is good.

And while I would maintain that the getting is not, in reality, good, it is better than it has been in the past. With the Fed pushing interest rates back up, investors are experiencing, for the first time in a decade and a half, Treasury bills that are yielding more than 5%2. The departure from the Fed’s zero-bound interest rate policy means that if you pull out of the market and put your money in fixed-income securities, you’ll receive a meaningful return on your investment.

Why is that a mistake?

All of this makes for a pretty convincing case to cut your losses and get out of the market. But let’s unpack what that would really mean.

Suppose, for example, that you exited the market in October 2022, which marked its most recent bottom3, and opted to purchase a fixed-income security. While market risk would have been averted in exchange for a fixed return, the market went up more than 20% in that time.  Therefore, you would be settling for a lesser return, and more importantly, forgoing the opportunity to recoup earlier losses.

The bottom line is that human nature, with its inclination to react out of fear, ultimately yields a failed investor.

What’s the better way to move?

Sometimes the best way to move is to not move at all.

Consider the example above. The wiser course of action for the person who has gone through those below-average returns and ridden them down to that bottom is not to jump off, but to stay put so he or she can be there for the opportunity to catch the potential for above-average returns.

The result of giving in to short-term thinking with panic-induced action is lower long-term returns. The only way to ensure capturing long-term equity returns is to ride out those not infrequent, often significant, but always temporary downturns. Attempts to time the market are doomed to fail because they will inevitably lead you to substandard returns as you withdraw from the market before you can reap the benefit of the upswings.

The something behind nothing

There’s a bit of a misconception about “doing nothing” in the face of financial turmoil. Far from being a lack of thoughtfulness, at N1 Advisors, “doing nothing” means relying on all the work that’s been put into place already. We’re able to advise clients to not give in to fear because we’ve put the time and effort into collaborating with you to create a purposeful plan that is designed for durability.

The most important time to stand firm is when the thing we fear is unfolding before us. But we are able to do that because we are standing on a solid foundation. And history shows us that when investors have a choice between running for cover or riding out market turmoil, riding it out has overwhelmingly won the day.

The team at N1 Advisors is honored to be your partner in long-term, sound planning that does not falter with each fear, but stays the course as we aim for a future of financial freedom for yourself and your family.

1 Source: Yahoo! Finance; S&P 500 (^GSPC) return from 10/12/2022 to 06/30/2023.

2 Source: WSJ.com; 1-Month US Treasury Bill Yield = 5.25% as of 7/12/2023.

3 Source: Yahoo! Finance; S&P 500 (^GSPC) S&P 500 Index = 3,577 on 10/12/2023.