Scared to lose 怕输

KIASU: 怕输 : pa(4) shu(1): Scared to Lose

Kiasu in the hokkien dialect means literally to be afraid to lose out. It is one of the fundamental human fears and has been linked as part of the ugly Singaporean myth. The reality is that all human beings regardless of your nationality are afraid to lose something that is precious and valuable to them.

Most people do not like to lose part of what they have or what they are and it is perfectly normal. The problem with achieving financial freedom is that the fear of losing hampens us from reviewing risk-return trade-off in any measure of objectivity.

Why is being excessively scared (fear) to lose a bad thing?
Fear is a human emotion that has its uses. It triggers the flight or fight response when we encounter stressful situations. During prehistoric times, when our neanderthal or homo sapien ancestors walked the earth along with all sorts of wild creatures, fear was what kept us from being eaten up by predators or hunted down by other tribes.

Fast forward to 2007, fear can be good for protecting our hard-earned money from being risked on high-risk low-return investments. My experiences in this continuing journey towards financial freedom is that knowing our own fears and overcoming them using logic, experience and a dose of decisiveness supported by an understanding of human psychology in markets help us achieve returns that can potentially match if not beat the rate of inflation (4-5%!).

However, fear works against us because when we are scared, we are afraid to try out different investment approaches, we become closed to new possibilities in investment and we become lazy to learn about the risk and reward trade-off between different asset classes and stick to tried and tested investment products such as fixed deposits that are safe but guarantee us loss of purchasing power of our money due to recent record inflation rates of 4 to 5%.

Feeling the fear and doing it anyway
I was also afraid of participating in the stock market during my first few years of starting work. I heard about stories of people making and losing fortunes in the stock market. It appeared to be a legal casino where people betted on prices of shares of companies going up or down on any given day. Like many of you, I also wanted to protect my hard-earned savings in order to grow it. Thus, at that time, my investment was mainly in fixed deposits and unit trusts.

The fixed deposits were okay because they were very safe and I deposited during a time when interest rates was 3-4%. However, as time went by, interest rates went south and then the Asian Crisis also hit. I saw my Singapore and Asian Unit Trust melt in front of my eyes. After all was said and done, I exited by unit trusts in 2002 with losses of up to 40% of my unit trust portfolio.

I had encountered my worst fears, i.e. losing money from unit trusts and it opened my eyes to the main weakness of such instruments, the fund managers earn their management fees whether or not they hit their benchmarks. That made me disillusioned with this type of investment and started me thinking about managing my own money by buying stocks and shares in the SGX and exploring other investment instruments like treasury bills.

Overcoming fear in the market place
The lesson I learnt (and am continuing to learn) in the stock market is that it is a market where buyers and sellers interact and is a confluence of fears of people at a particular point in time. Because people are involved, the movement of the market is as rational as the next human being, i.e. it can be high irrational.

That beingthe case, we then need to be as rational as we can be in approaching our investments because if not we tend to be derailed by our own fears and greed. Here are some ways I overcome my fear:

1) Get knowledgeable about investments
There is no excuse not to know more about investments. With the internet and public libraries, you can get information about stocks and shares, property, commodities, treasury bills etc all at the touch of the mouse and keyboard or a short trip to the library. Get yourself a free education in investments. Read all the investment books you can get your hands on!

2) Have an investment plan and objectives
Most people say I want to make money from investing my money. Be specific, set clear goals, e.g. I want to have total net worth of $500,000 by age 50. Or I want to have $1,000,000 investible savings by age 60.

3) Work out strategy to achieve your investment objective
Having a target to shoot for will help you focus your efforts and energy but you also need a strategy how you will execute your plan. For example, my strategy is to ride on the stock market while Singapore's economic fundamentals are strong to grow my investible capital with a view of switching to property in year 2010 where I think there may be a correction. This approach is fluid and is not cast in stone as I have to make allowances for changes in family circumstances as well as market developments.

While doing so, I will also maintain a reasonable allocation of 20-30% cash and cash equivalents (treasury bills/fixed deposits) vs 70-80% in equities. This allocation can change if for example the equities market turns bearish.

4) Execute strategy and keep eyes and ears open to market developments
Having your objective and strategy allows you to be less swayed by fear in the market. While no-one can consistently time the market 100% of the time, if you have a strategy, at least you will be less panicky and reactive and make your investment decisions in a thought-out methodical approach. I know I cannot fully time the market hence I invest in many blue-chip sound businesses and monopolies and have 20-30% cash/cash equivalents to buffer myself. Being 100% in one or another is too extreme and does not fit into my investment strategy.

Fear is a two-sided knife - it can cut both ways
Fear can be used good if you use it to your advantage. I fear financial insecurity and hence work at disciplining my spending and lifestyle habits. I fear the effects of inflation on my networth and purchasing power and hence invest in portfolio of assets to try to beat 4-5% return. I also fear losing my hard earned savings and hence do not put ALL my investible savings in ONE asset class.

What is your own fear doing to or for you?

Take control now.

Be well and prosper!