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Avoiding the Perpetual “State of Fear”

By Doug Buchan, CFP®

As many of my clients and all of those who have attended my seminars know, investor behavior and behavioral economics is a fascination of mine, and it’s an area I spend a significant amount of time studying. In investing, panic is one of the key behavioral tendencies that folks must avoid. Easy to say, easy to write, but hard to do as the fear of something seems to be all around us at all times. Why?

In a fictional book that has been discussed all the way up to the halls of Congress, Michael Crichton’s State of Fear has certainly stirred up passionate debate. Although I won’t enlighten you with my opinion on what is typically deemed to be the crux of the book (the degree of global warming), I do want to address the underlying theme of the book, namely the degree of fear that everyday people feel. Below are some excerpts from one of the more interesting characters in the book, Professor Hoffman.

“Has it ever occurred to you how astonishing the culture of Western society really is? Industrialized nations provide their citizens with unprecedented safety, health, and comfort. Yet modern people live in abject fear. They are afraid of strangers, of disease, of crime, of the environment. They are afraid of the homes they live in, the food they eat, the technology that surrounds them. They are in a particular panic over things they can’t even see – germs, chemicals, additives, pollutants. They are timid, nervous, fretful, and depressed… Everything is going to hell, and we must all live in fear. Amazing…

…In the old days, citizens of the West believed their nation-states were dominated by something called the military-industrial complex… for the last fifteen years we have been under the control of an entirely new complex, far more powerful and far more pervasive. I call it the politico-legal-media complex. The PLM. And it is dedicated to promoting fear in the population – under the guise of promoting safety…

Western nations are fabulously safe. Yet people do not feel they are, because of the PLM. And the PLM is powerful and stable, precisely because it unites so many institutions of society. Politicians need fears to control the population. Lawyers need dangers to litigate, and make money. The media need scare stories to capture an audience. Together, these three estates are so compelling that they can go about their business even if the scare is totally groundless – As if it has no basis in fact at all.”

Now, remember – these quotes are from a fictional character in a fictional book, but, as I read it, I concluded that Hoffman wasn’t talking about politics or law or media – he was talking about investing (I can relate just about anything to investor behavior!). The basic tenet of Hoffman’s rant that I abbreviated (full soliloquy is on pages 450-460 of the book) is that many broad based powerful entities may be completely unconnected but they all have a similar vested interest in promoting fear.

Who or what is better at contributing to the fear than the financial media, most famously, CNBC? They work hard to keep investors focused on the apocalypses du jour. They work to keep investors glued to see which market or sector or region or stock will crash next and what you should do about it this very instant. Encouraged by this 24/7 financial media, folks sell or buy or tweak or trade based on the news of the day.

And, if the financial media can’t get you to act based on fear, they’ll tug on the other emotion, euphoria/greed/envy (but more on that in a different essay). The financial media tugs at the emotions to get investors to watch their station or read their publication. Then, the urge to act – to buy or sell or tweak - becomes too irresistible because of the fear of being wrong in the short run.

And the action investors take to try to prevent being wrong in the short run will, inevitably, result in being wrong in the long run. They sacrifice a long term strategic financial and investment plan that can guarantee their inevitable success for perceived short term relief – because of fear.

Proper and successful investing has gotten much more difficult with the advent of this 24/7 “pop financial media” because it is filled with so much noise and nonsense. Avoid the lure of CNBC and their market predictions and articles from Money Magazine titled, “The five best funds for 2011.”

The best thing you can do is to build a long term strategic investment plan that is built based upon your own unique willingness, need and ability to take risk. The only way to determine your unique risks is through the creation of a comprehensive financial plan. Once that long term strategy is created, resist the urge to over-tweak, and resist the urge to turn on the noise. Instead, read a nice thought provoking novel such as State of Fear.

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