Has the Covid-19 pandemic got you feeling a little more uncertain about your money than usual? Have you found yourself second-guessing your investment choices? Or are you worried that you might exhaust your current savings? You are not alone. Consumer fear about money can be especially high during times of crisis.
According to psychological insight from IG, however, you need to control this fear because if not, it can negatively impact your financial decision making, including how you trade if you are an investor. Here is what you need to know.
[top_pitch]
How has Covid-19 driven consumer fear?
The Covid-19 pandemic has brought a lot of uncertainty to people’s lives with a large number either becoming jobless or seeing their income reduce. So it’s no surprise that consumer fear about money is currently high.
A recent report by comparethemarket.com, for example, revealed that 53% of Brits were fearful of losing their savings during the pandemic.
With the economy not expected to recover to pre-pandemic levels until mid-2022, consumer fear is almost certain to remain a reality for many in the near future.
Of course, fear is not without consequences. One major effect if you are an investor is that it can negatively affect your ability to make sound trading decisions.
How does consumer fear impact trading decisions?
According to the IG report that explores the psychology of trading, fear in trading is often linked with distress and is caused by the threat of loss, real or imagined. This fear needs to be kept in check for one important reason: it can cloud decision making.
Fear can cause a trader to close out a position prematurely. Alternatively, it can cause them to lose out on profit by being too afraid to open a trade.
More often than not, it is the less experienced traders who tend to be more affected by fear. According to IG, this could be because professional traders have experienced more losses than new traders. As a result, they may be more comfortable with the risk of loss in order to secure a profit.
Traders with more experience may also be more disciplined. They may recognise the benefits of losing a trade rather than allowing it to continue.
Having said that, fear does have one beneficial effect: it can help control impulsivity.
[middle_pitch]
How can you limit the impact of fear?
According to IG, one way to mitigate the effects of fear is to simply approach each trade with a plan. You can also place stops to reduce any losses and apply limits to lock in profits.
If you have conducted enough research and analysis and set your trading stops and limits at the appropriate levels, you should be confident that you have done everything possible to avoid unnecessary losses.
Can adopting a long-term strategy also help?
A long-term strategy is a good, if not a better way of lessening the effects of fear. A long-term strategy relieves the stress of worrying about short-term fluctuations in the stock market, which are all too common.
The market may have ups and downs, but it almost always goes up over time. If you can ride out the dips, then you are likely to see gains in the long term.
The current pandemic is showing the market’s resilience and long-term upward bias. After consumer fears about the pandemic’s impact on the global economy initially caused financial markets to crash early last year, most have gradually recovered to pre-pandemic levels. Some Wall Street stocks have even rallied to new all-time highs!
