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Of course investors worry; it’s not in human nature to avoid worrying altogether. But it pays to remember that most things we worry about never happen. As humans, we are bred to overreact, to dwell on or even brood over any hint of risk.
There are always investment-related worries to occupy our minds. Today, they range from a potential Iranian nuclear threat to the seemingly endless process of defusing the European debt crisis. Sometimes for investors, they’re high risk investments that they have made.
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Why we’re patterned to overreact to unseen threats
For hundreds of thousands of years of prehistory, humans lived together in small tribes. As hunter-gatherers, they were steadily on the move. They were also under constant threat from predators and members of other tribes. At night, if you woke to every sound from the bushes, you lost some sleep, but you cut your risk of being eaten by a sabre-toothed tiger or killed by an enemy sneak attack.
If you possessed the ability to worry constantly about unseen threats, you were more likely to live till you reached puberty, so you could pass along your worrywart genes to the next generation.
Investors may be more sensitive to risk than others
Today we face much less risk from animal predators and human marauders. But many people still carry this hair-trigger fear response. This is especially true for investors that worry about the high risk investments they make. They spend more time than they should worrying about things that have very little chance of actually happening—or will work themselves out much less dramatically than some of the more strident commentators would have us believe.
Many of you are the kind of investors who seek out information from a variety of written sources, where it’s much more extensive and detailed than what you get from a glance at newspaper or Internet headlines, the evening news or commentaries on TV. However, some of that information is biased, overblown or incorrect.
This doesn’t mean you should ignore potential threats. You simply need to put them in perspective.
Anxiety recedes with investment quality, diversification and balance
You’ll find that many of your worries concern things that are unlikely to happen; that are already largely discounted in current stock prices; and that probably won’t matter as much as you feared they would.
You get a much better return on time spent if you devote less of it to worrying about high risk investments, and more of it to an investing strategy. Create a strategy that is built upon analyzing the quality and diversification of your investments, and the structure and balance of your portfolio.
There’s another advantage as well. A calm investor is much less likely to react in haste and make sudden decisions that could prove to be damaging in the long run.
Investing tip: Use our three-part strategy
No matter what kind of stocks you invest in, you should take care to spread your money out across the five main economic sectors: Finance, Utilities, Consumer, Resources & Commodities, and Manufacturing & Industry.
By diversifying across most if not all of the five sectors, you avoid overloading yourself with stocks that are about to slump simply because of industry conditions or investor fashion.
You also increase your chances of stumbling upon a market superstar—a stock that does two to three or more times better than the market average.
Our three-part Successful Investor strategy:
Are you more comfortable taking risks now than you were when you began investing? Are you more willing to remain invested when the market takes a turn for the worse? Do you have examples of stocks you own now that you would not have bought earlier in your investing career? Share your experience with us in the comments.
Note: This article was originally published in 2014 and has been updated.One Comment
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