By Chuck Jaffe | MarketWatch | June 16, 2014
My friend Mike grabbed my arm as he barged into the conversation I was having with some other guys.
“What I really want to know, is where do you think I should invest now?”
I could have given him the usual answer — that I’m not a financial adviser and that I don’t pick investments for people — but instead I answered his question this way:
“That may be what you want to know, but what you need to know first is ‘What’s your greatest financial fear?’”
Mike, a pilot, immediately answered that he’s worried about another layoff. Chris, to his right, is scared of the market having a repeat of the meltdowns he saw in 2000 and 2008. Bob said he worries about outliving his money or needing long-term care.
And so it went for a few minutes, each guy coming up with a few legitimate things to fear, or nodding in agreement with the concerns cited by someone else, as the worries ran from current socio-economic events to providing for a special-needs child, to fear of missing out on the market’s gains, to not being able to pay to put the kids through college and more.
Finally, Mike said, “Maybe you just say that what I fear the most is losing money or mismanaging money.”
The problem with all of these concerns is that even if you work to solve your biggest fear, you may still feel vulnerable to other worries.
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If losing money in the market is your biggest fear and you go to all cash in response, you assuage the big worry, but over time you will have a growing scare that your money isn’t keeping pace with inflation or, perhaps, that you will outlive your nest egg.
Moreover, if you take that kind of all-or-nothing position, having everything in cash could leave you afraid that if the market doesn’t have a comeuppance soon, you’ve lost real opportunities to grow your savings.
While an individual’s financial fears morph and evolve, risks don’t. Certain dangers may be more or less present based on current events and conditions, but the underlying risks don’t change.
As a result, it’s important for investors to see how their worries align with the various types of risk.