Fear stops most people taking enough equity exposure in their portfolios. Fear keeps people paralysed, sat on too much cash. Fear causes people to sell equities during a crash. Fear is behind the hand-wringing that passes for debate about safe withdrawal rates. Fear causes One More Year Syndrome. Fear of change keeps people trapped in bad jobs and bad relationships.
The first thing to realise is that we are not accurately calibrated to match the fear we feel with the actual threat. We are the descendants of the twitchy monkeys in the jungle that ran away when they heard the leaves rustling.
Most of the time the rustling of the leaves is just the wind. But note the asymmetric payoffs. If you run away and your fears were right (tiger) that’s an optimal response. If you run away and you were wrong (no tiger) then you’ve burnt a few calories unnecessarily…but you live to make monkey love another day. The real problem arose for the monkeys that felt no fear (or ignored their fears) and were wrong. The tiger got them and they exited the gene pool.
These asymmetric pay-offs resulted in an evolutionary equilibrium in which the optimal survival response was to feel a bit more fear than justified by the objective level of threat. That’s how we turned out this way.
There are also strong evolutionary incentives to conceal your fear from other humans. If you are a young male, you don’t want to reveal fear to male peers as they might exploit it, tell others in the tribe, or exclude you from their hunting group if they doubt your effectiveness.
The evolutionary incentives to conceal fear from females are even stronger. Confidence is a powerful signal in mate selection. Confidence signals effectiveness, the ability to defend territory, secure resources and protect offspring. Conversely, fear signals weakness or danger. This is why idiot male bullshitters enjoy a temporary irrational advantage in the early mating years before everyone eventually figures this stuff out.
This is our evolutionary baggage. It’s why we find it hard to assess threats rationally and even harder to talk about it and ask the people around us for help.
It’s sad that many people are, under the surface, terrified pretty much all the time. People’s fears are endless and varied: getting fired by the boss or spouse, poverty, homelessness, addiction, illness, ageing, children growing up and leaving, social exclusion. And those are just the rational ones…before we get on to the irrational ones like fear of spiders, ghosts and Zombie Apocalypse.
The Escape Artist always felt plenty of financial fear and channelled this into motivation at work. A certain amount of financial fear can be a healthy prompt to buy your freedom as quickly as possible.
Too much fear for too long however will damage your health. We are well adapted to be scared for short periods of intense threat (sprinting from the tiger). We are however not well evolved to deal with long periods of stress (money worries, bad boss etc). This is why indebted wage slaves have back pain, headaches and a range of stress-related conditions. Your body is trying to tell you something.
One of the fascinating things I’ve been learning is that fear of poverty might overlap with fear of social exclusion. This theory is based on evolutionary psychology and, very roughly, here’s how it goes:
When we are babies, we are helpless and our survival is 100% dependent on our parents. If they reject us, we will almost certainly die. This is why we feel love as security. In a very real sense, they are the same thing.
As we develop and grow up we gradually gain self reliance and confidence. But fear of lack of security and resources remains closely tied to fear of social isolation throughout our adult lives. These fears are as painful as if they were life threatening because in evolutionary terms, they were life threatening.
In our evolutionary environment we would have remained inter-dependent on our tribe throughout life. Without a welfare state and without food storage, we remained at risk of intermittent starvation at all times. This is we value generosity and reciprocity and why our brains are hard-wired to enjoy and reward community activities.
If you focus only on money, you may neglect your social capital. There are emotionally isolated billionaires who are still terrified of poverty, despite their huge financial stashes. I once saw a documentary about a billionaire who had all his yachts fitted with guns, gold bullion and food so he could take to sea to protect himself from the world. He would have been better cultivating some friends who valued him for qualities other than just wealth.
The Escape Artist does not claim to be normal. Normal is over-rated. In a modern capitalist environment, my abnormal rationality is a valuable gift when investing and was rewarded working in finance. But The Escape Artist may have been a bit of an emotionally retarded fuckwit during those years. I realise now that people want financial security for a complex range of reasons. Its often not lack of money that is the problem, its lack of meaning, time and rewarding relationships.
Don’t get me wrong, being financially independent is fucking awesome. I’m not suggesting that you should stop seeking FI and spend money on healing crystals, wind chimes and therapy. But there comes a point when you realise that money is necessary but not sufficient and its time to move up the pyramid of financial independence.
Reaching an understanding of your fears and taming them is difficult but its one of the most rewarding things you can do. Once your irrational fears are gone, the benefits accumulate and, thanks to the aggregation of marginal gains, this improves your life in multiple ways that you can’t predict.
Let’s take the very common fear of equity volatility as an example of how to think about and address fear.
The first step is to identify and admit to our irrational fears. This is not as easy as it sounds. The human mind has great capacity for self-deception and rationalisation. I used to tell myself my fear of poverty must be rational. Not true. The ultimate reason I was worried about equity volatility was that I was worried that I could lose all my money and end up starving to death. See what I did there? By writing it down, I reveal how ludicrously vague and unlikely that fear is.
Once you have admitted your fears, you can then learn more about them. So you read some books to begin the process of understanding yourself, investing and volatility.
You can then start to build resistance to fear by gradually increasing your exposure to the source. Take action…but start with baby steps. A good place to start is by drip-feeding monthly savings to build equity exposure via an index fund. Over time, you watch this grow and fluctuate in value. This is a bit like getting inoculated against a virus – you introduce a mild form of the virus which acts as a vaccine which your body learns to deal with.
You can avoid much fear by removing the news media and its scare tactics from your life. You can regularly re-read Chapter 8 (The Investor and Market Fluctuations) of The Intelligent Investor. Eventually you learn to live with volatility and embrace the opportunities it brings.
Let’s assume we’re scared of the equity market crashing by more than 40% from peak to trough. This happened twice in the last 15 years and can’t be considered a Black Swan. We need to ask: why this would be a problem?
So let’s play a fun game called: What’s the Worst That Could Happen?
What if equities fell by 50%?
If the stock market crashed but companies kept paying the same dividends, what’s the problem? I’d be unaffected…other than having the option to buy more shares at bargain prices. This would be a great opportunity.
What if I panic sell all my equities at the bottom?
I’m not going to do that. Thinking about what to do in a bear market beforehand makes this far less likely. I have confidence from demonstrated performance because I have lived through bear markets before.
But what if I got panicked by scary media reports?
Turn off the TV, the talking head commentators and the fortune tellers. That shit is toxic.
But what if all companies stopped paying dividends?
Lets be realistic, the only circumstances where that is going to happen is a genuine apocalypse whether caused by zombies, asteroid strike or whatever. I can either try to prepare for that or, more realistically, stop worrying about stuff I can’t control.
I have enough in cash and gilts to sustain my current spending rate for well over 5 years without selling any equities, which is probably enough to see out a bear market. If I stopped buying swimming pools and other luxuries, I could make that period much longer.
But what if the communists seized power and confiscated all my money?
This is starting to get silly now. But let’s keep going.
I’d apply for a job at the local potato collective or tractor factory. When I was in college, I worked lots of these jobs. I worked the night shift on an assembly line at a pork pie factory. I worked in a tomato packing factory. I worked in a factory making electrical widgets. I’ve driven a van delivering to supermarkets. I’ve worked in Tesco (an excellent job in the fruit & veg section since you ask).
It’s a great source of life experience and mental strength to have worked these jobs. The surprising truth is that those supposedly low status jobs were often more fun than working in senior roles in financial services.
But what if you couldn’t get a job at the potato collective or anywhere else?
Well, I would always have the option of getting myself thrown into prison.
But how would you survive in prison?
I’d read in the prison library. I’d shoot some hoops in the yard. I’d do enough weights to not be anyone’s bitch. And do you know what? I’m not sure I’d be any worse off than trapped in a glass box in an office building for the rest of my life.
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