Fear Punished My Net Worth — Don’t Let It Damage Yours

Don't let your fear of risk hold you back.

I started investing decades ago, in my mid-20s, and I have done well. That said, I could have grown my net worth even more had I not been so fearful.

Unfortunately, I let my mind impact my investing strategy. Now, I’ll share the faulty thinking that curtailed my future net worth. Hopefully, with my doing so, you can avoid making the mistakes I have.

Click to read more about how to calculate your net worth.

Stocks Are Too Risky

The 1929 stock market crash and Great Depression influenced my parents and penetrated my thinking. I remember stories about men jumping off buildings after losing their fortunes in the stock market. In my mind, investing in stocks meant you might lose money.

So, when I first began investing, I fled risk and opted for what I thought was safety.

More on Stock Market Crashes: How Much Would These Billionaires Lose If the Stock Market Crashed?

My First Retirement Workshop

In my mid-20s, I attended a retirement workshop that instilled in me the importance of saving and investing early. Shortly after that, with my few thousand dollars, I visited the local Prudential Bache brokerage firm (now long gone) and opened an investment account. I met with the stockbroker and asked how to invest for the future. In fact, I was so fascinated with finance that I borrowed and studied the brokers’ investment training workbooks.

The savvy broker listened to my fears about investing in stocks and guided me towards bonds and a mortgage-backed securities fund with decent interest payments. Back in the 1980s, it was lucrative to invest in fixed securities. Inflation was high, and so were the returns on bonds and mortgage-backed securities. Fixed income investments bounced between five and 11 percent annually. (Today, those high returns sound like a fantasy.)

As it turns out, stock market returns during the 1980s were robust, with few losing years, but I was getting a very nice return on my small investment account. So, what was the problem?

Struggles and Smart Decisions

By the mid-1980s, I was working at San Diego State University. At another investment workshop, the lesson of saving and early investing was strongly reinforced. Compounding returns can explode your long-term wealth, and the numbers in favor of stock market investing were powerful.

So, I made a bold decision. I committed the maximum to my 401k account. I dialed back my fear of investing in the stock market and began adding stock market funds to my conservative bond investments. I lived modestly (OK, bare bones) and dipped into my savings periodically to meet my expenses. And it paid off: I contributed and invested $29,375 into that 401k account, and today it is worth six figures. Overall, I earned an annualized 7.67 percent return.

But, here’s where I made a mistake.

Loss Aversion Kicks In

As behavioral finance studies explain, humans aren’t rational. We feel the pain of a loss more strongly than we do the pleasure of a gain. This reality leads most investors to be very cautious, sometimes even holding on to losing stocks because they want to wait until the price rebounds (which might not happen). It’s called loss aversion.

In my early 30s, saving for retirement in the TIAA-CREF (now TIAA) 401k, I sensibly invested 75 percent in a stock fund and 25 percent in a fixed income fund (like a money market account). At first glance, this was a smart move, as the fixed TIAA fund paid 7 percent. What I didn’t realize was that the 7 percent return wouldn’t continue indefinitely but would vary based on market interest rates.

Flash forward to this decade, when I was lucky to earn more than 1 percent on the fixed portion of this account.

Read: Here’s Why I’m Not Rebalancing My Portfolio This Year

The mistake I made in my early 30s was that due to my fear of loss, I invested 25 percent into the fixed income fund. With decades until retirement, I had many years to ride out the inevitable drops in the market. For that retirement account, had I invested 90 percent in the stock fund and 10 percent in the fixed fund, my return would have increased by at least $40,000. That’s a lot of money to leave on the table.

Learn From My Mistakes

From my 20s and through my 40s, I invested too conservatively. I maintained a 60 percent stock/40 percent bond portfolio because of loss aversion. Had I adjusted my asset allocation to reflect more stock market investments during those years, I would have earned approximately 1.8 percent higher returns per year.

So, what’s the loss of 1.8 percent on a $100,000 investment over 20 years? Let’s say, for example, that you invest $100,000 for 20 years at 8.4 percent. You’ll earn $501,863. But invest $100,000 for 20 years at 6.6 percent and you’ll earn only $359,041. The 1.8 percent return difference is nearly $143,000.

I did many things right: I started investing early, I regularly invested in both stocks and bonds, and I lived modestly and put the excess into the investment markets. I’ve hit my retirement goals. But, had I not been so afraid of losses, I would have a significantly larger net worth today — like mid-six figures higher.

Discover: 20 Smart Investments Everyone Should Try

The Takeaway

For investors today, I’m not suggesting that you immediately switch your investment asset allocation to a 90 stock/10 bond portfolio. Especially now, as we’re amid a 10-year bull market. But, if you can leave your money invested for 10 years or more, don’t be afraid to tweak your investment allocation towards the aggressive side.

Just be aware that stock market returns go up and down. Many experts, myself included, predict lower average stock market returns going forward to offset the recent higher than normal stock market returns.

Click to read more about how to start investing when you don’t have much money.

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