A Fresh Look At Fear-Based Investing

While Christians and Christianity have taken many often-justifiable hits over the past couple thousand years, the actual person of Christ has remained compelling, even irresistible, for most, including me. Having followed His story for many years, I confess I was surprised, then, to only recently learn the directive that Jesus gave most often in the accounts recorded in the Bible. Do you know what it is?

“Do not fear,” or some derivative is recorded between 20 and 25 times in the Gospels (depending on translations), putting it ahead of other common refrains of Jesus, like “Love one another” and “follow me.” Fascinating, right?

Indeed, of all the emotions that can steer us toward suboptimal decisions, fear may be the most powerful because of its physiological implications, in addition to its psychological. And it feels like we’re in a season of fear, especially now.

It is fear that seems to be the predominant state of our national discourse at present, fear that is used by politicians to drive us to act on their behalf, and it is certainly fear that represents at least 50% of the motivational force of the world’s investors at any point in time.

Presently, there is plentiful fodder for investors to fear. Even beyond the many global macroeconomic factors and instability around the world, there’s much to fear right now in the U.S. alone—like sustained inflation, the interest rates that the Fed has pushed higher (until recently) to tamp down said inflation, and yes, a doozy of a political cycle that requires little hyperbole these days to inspire fear. That begs the question:

How should I adapt my personal investment philosophy or portfolio based on international events or politics?

First, the evidence would suggest that we shouldn’t make major changes to our portfolios simply based on the occurrence or likelihood of international events or major disruptions in domestic politics. For example, if we focus solely on the fear du jour today, following two of the craziest and most impactful debates that the U.S. has ever seen in presidential politics, let’s see what impact the president—or president’s party—has had on the markets historically:

The difference is visually indiscernible over that long time span. Yet many on both sides of the political spectrum still insist that the markets would, could, or should do better when their party’s president has power, so what do the numbers suggest would be the outcomes if we only invested during the stretches when our preferred president is in power?

Over the past 10 years—a notably contentious stretch of presidential politics, to put it lightly—you’d have roughly halved your investment return by sticking to just one party. And over the past 70 years, your investment record would look like an abysmal failure if you only stuck to one party—and a massive success if you invested through both:

Whether it is presidential politics, the rise and fall of international economic powers, the next pandemic, or even the scariest conflicts around the world, these investing fears all fit into the same category dubbed by Amelia Earhart, someone I think we’d all acknowledge knew a thing or two about fear. They’re all “paper tigers,” a phrase she borrowed with ancient Chinese cultural roots.

Erhart said, “The most difficult thing is the decision to act. The rest is merely tenacity. The fears are paper tigers.”

So, what are your paper tigers?

And, does that mean there is nothing in the world that could happen that could warrant a change to your portfolio or investment philosophy?

Nope.

There are instances in which it may be appropriate to make a shift not based on external events—but based on your internal response to such events. Because fear has physiological triggers, there are certain things we can’t (or won’t) necessarily be talked out of fearing. (Giant, hairy spiders, anyone?) Self awareness is the key in this case.

Therefore, if the current or future state of affairs fills you with such angst that you are likely to lose sleep over short-term market volatility—or to make a spontaneous, wholesale decision, like moving to 100% cash—it may be wise to reassess your personal goals and adjust your portfolio accordingly, but hopefully moderately.

Of course, you can only calibrate your plan if you have a deliberate and purposeful investment plan in place. Too many investors have a mere collection of securities without purposeful cohesion. If you’re looking for help on that front, consider investing in the language of life.

And then, by all means, do not fear.