Fear is for Halloween, not for money management

Halloween is here and there are ghosts, zombies and vampires around every cobwebbed corner. It can be fun to be frightened (or the frightener!) when it's a situation we choose, but when it comes to money, most of our fears do us more harm than good.

I grew up in the United States and loved the calculated risks of Halloween as a kid. The fear was somewhat known and there was some comfort that there were adults around. But you had to make your own decisions about the risk of venturing further into the neighbourhood, surrounded by people you didn't recognise, and decide whether the house two blocks further away might have better candy.

Understanding your own fears as an investor is just as important. Investing always carries risks, but you need to have a plan and stick to it. Don't let fear trick you into bad decisions, and listen to people who've been through market cycles and know that they're a regular part of investing. Markets recover over time, and investors who hold their nerve during tough times are usually rewarded in the long-term.

So, what investment fears make most of us jump, and how can we stare them down?

1. FOMO

Fear of missing out can lead investors to make impulsive decisions - if everyone else is buying, should you buy too? Maybe not. Sometimes markets rise because of a "herd mentality", when investors buy for irrational reasons - FOMO or "fear of missing out". Buying in this environment and following the herd can sometimes limit your opportunity for returns because the value has already jumped. Don't feel compelled to follow others when it comes to your money - if you have a plan (and you should) then stick to it.

2. Fear of loss

When markets get the jitters, sometimes all it takes is for someone to say "Boo!" and investors start to panic. And panic-selling is just as bad as buying at the top - if an investment is losing value, the only way to realise the unfortunate loss is to actually sell. Many times, it's best to hold onto it until the inevitable recovery. Market cycles - both ups and downs - can cover years, and making hasty decisions based on a day's or month's headline news is a common investor mistake. Following the crowd doesn't always pay off - instead, focus on your long-term goals. You don't need to look at your portfolio every day either - getting overly excited or worried by short-term gains and losses is another common trap.

3. Fear of risk

"No risk, no reward" is an investment cliche for a reason. Risk and return are closely linked, so you need to understand how you feel about risk and how you're likely to respond to the natural cycles of investing. That's not to say every investor should be aggressive with their investing - far from it. Investors are all different and some are more comfortable with risk than others. But knowing what you can afford to set aside - and for how long - is critical to investment success. Diversification, or putting your investment eggs into different baskets, is also a smart way to spread risk (higher or lower) to suit your own situation.

4. Fear of the unknown

Stepping into the unknown can be frightening and if you've never had an investment portfolio it can seem daunting. But it's not as scary as you might think. Technology has levelled the playing field when it comes to investing, making it possible for investors with any level of experience to create a low-cost, professionally managed portfolio of diversified assets.

Pat Garrett is the co-founder and chief executive of Six Park, a low-cost automated investment service backed and managed by investment experts.

This story Fear is for Halloween, not for money management first appeared on The Sydney Morning Herald.