The Fine Line Between Good Fear and Bad Fear
Key Points – The Fine Line Between Good Fear and Bad Fear
- Fear Is a Very Real Thing in the Financial Business
- The Differences Between Good Fear and Bad Fear
- Defining Risk and Investment Loss
- Good Fear vs. Irrational Fear
- What Are You Afraid of?
- 19 minutes to read | 30 minutes to listen
Fear is a very real thing in the financial business, and how you react to it can make a huge difference. There’s a fine line between good fear and bad fear. Good fear can lead you to being educated about what’s going on in the markets and being dynamic with your financial plan. Bad fear involves overreacting to things you shouldn’t be too concerned and doesn’t allow you to live life like you want to. Learn more about that fine line from Dean Barber and Bud Kasper, as they break down the different types of financial fear.
Fear Is a Very Real Thing in the Financial Business
Bud Kasper: Same to you.
Dean Barber: We’re going to be talking about something today that has been all over television. It’s in all those scary movies out there. It’s all about fear. That gets your heart pumping a little bit and makes you jump out of your seat.
Bud Kasper: Chucky.
Dean Barber: My wife is loves scary movies.
Bud Kasper: Really?
Dean Barber: Yeah. She’s like, “Let’s watch another scary movie.” Oh my gosh, seriously? They are all so predictable. Turn on the lights so you can actually see something.
Bud Kasper: I like that commercial where the couple is running away from danger, but they run over to where the chainsaws are hanging. That’s not good planning, folks.
Dean Barber: There’s a lot of humor out there in some of that—if you can poke fun at it a little bit—but in our business, fear is very real. We want to talk about good fear versus bad fear.
The Differences Between Good Fear and Bad Fear
Ask yourself the question, “What are you really afraid of?” Determine if you are afraid of the wrong things. It’s critical to step back and ask what it is that we’re afraid of missing out on. What are we afraid of? When people think about investing, they have this innate fear of loss. Everybody wants to have their cake and eat it too. They want to make money, but never have a chance of losing money.
We both know that’s not a reality. Even those equity annuity, equity index annuity, or fixed index annuity—whatever they’re calling them today—don’t provide that. Your principal value can’t go down so you can’t go negative, but the risk of loss of gain is huge. They’re going to cap out your potential long-term performance. All that fear of loss comes from a true lack of understanding of your overall financial picture and what your money needs to do.
As we dive into good fear versus bad fear and talk about what it is that you are afraid of, we’re going to discuss the heart of where financial planning really comes into your life. Along with eliminating those unnecessary or unhealthy fears, we want to provide clarity, which brings confidence and ultimately puts you in control of your overall financial life. That’s where everybody wants to be.
Known and Unknown Fears
Bud Kasper: Agreed. The reality is that people naturally have some fear associated with what is known. I always like to look at the known or the unknown. We can understand certain aspects of what risk is. But from the client’s perspective, it’s like, “All right. I understand all this. I know what was unknown, but now that unknown that I really don’t know about scares the tar out of me.”
That’s human nature from that perspective. A lot of it has to do with experience, familiarity, and understanding what your money is doing for you in the construction of the portfolio itself in terms of potential downside risk.
Dean Barber: It’s interesting because we had some unsettling days in the market in September. We experienced almost 5% negative for the month. As all the mania was happening, I got a call from the radio station and they said, “Dean, would you talk about what’s happening in the market today?” I said, “Absolutely. I’d love to do that.”
The main thing they wanted to know was if this is the next bear market. I said no and firmly don’t believe that it is. I believe that we’re experiencing healthy and normal volatility. The backdrop to what is driving the markets should lead us to a higher market before year’s end.
Little did I realize that that higher market would go back and eclipse the market highs that were set in early September and already happen here by Halloween. I thought that we would get there by the end of the year, but I didn’t think it would be this quick. If you look at the backdrop of what’s happening, the fear of a bear market in today’s environment is an unhealthy fear because it’s not in the cards right now.
Control Leads to Confidence in Your Planning
Bud Kasper: You asked me that question in early September. I thought we’d have another 5-6% before the end of the year. You looked at me and said, “Really?” I said, “I just look what we can control. What we can control is what the Federal Reserve is doing because they’re having trouble controlling themselves.
I’m laughing at that only from the extent that they have so much power to change what happens inside of markets that it is necessary for us to understand how your money would react if they raise the Fed Funds Rate, if inflation goes higher. We can test for all these different applications of risk that people fear. That can satisfy us. It’s not going to say that it’s always going to repeat, but at least it’ll give us our way of getting our arms around the issue.
Dean Barber: From a fundamental standpoint, that’s what gives us confidence in the planning that we do for people. There is a lot to that, but if there’s a lack of education or understanding of what we’re doing, why we’re doing it, and how we’re doing it, then that’s where that unknown comes in.
One thing that we’ve really tried to do over the last two decades of America’s Wealth Management Show is educate people. I’m going to do a better job of that than ever before. I encourage you to sign up for our biweekly Barber Financial Group Educational Series.
Our next one is titled, Financial Planning for the Holidays, from 6-7 p.m. on Wednesday, November 3. Drew Jones, one of our CFP® professionals, and I will discuss using your money for experiences during your lifetime, rather than giving cash or buying Christmas gifts. It’s a great educational series. Make sure to sign up for that.
Money Velocity Is the Root of Inflation
Dean Barber: As we continue to talk about good fear vs. bad fear, I want to talk about something I saw on social media last week. Jack Dorsey tweeted, “Get ready for hyperinflation.” He couldn’t be more wrong. For us to have real inflation, we must have money velocity. It’s not money supply that causes inflation; it’s money velocity. Two things are holding back money velocity right now. One of those things is technology.
Netflix vs. Blockbuster
Let’s use an example of Netflix versus Blockbuster. As Blockbuster was trying to get its movies in the hands of the individual, they would rent the movie. Quite honestly, we can rent a movie right now from Netflix for the same price that we could rent it from Blockbuster.
But what was the cost of Blockbuster to get the physical movies into the store? Every film, every disc had to be physically made. Then, they had to be shipped and stored. That created money velocity within that industry.
We could go across all kinds of industries. Along with slowing at the corporate level because of technological advancements, money velocity has also slowed at the individual level because most of the wealth is being held in people who are 55 and older. It’s the youngest baby boomer and older.
Those people are all focused on getting to a point in life where your money’s working for you and rather than you working for your money. They’re saving as much as possible and paying down debt as fast as possible. That reduces money velocity.
Until the technological advancements slow and the Gen X and Gen Z start having babies and spending money like crazy, that money velocity is going to remain fairly muted. My guess is that once we get past what’s happening with the supply chain issues, we will probably see the inflation rates go back into that 2% to 3% that we’ve been experiencing for the last two decades.
It’s the Content that Counts
Bud Kasper: I totally agree with that. You brought up an interesting point because in any store like that—or whether it’s Disney or anything else—it’s content that counts. What did Netflix teach the industry? They’re creating their own content. And by golly, they do a great job with it. They bring in so many viewers. The thing that killed blockbuster was technology.
Dean Barber: Blockbuster ignored it.
Bud Kasper: I vividly remember walking up and down the aisle at Blockbuster. I’d say, ‘Hey, I think this is going to be a good one.’ Then the employee might say, ‘Oh, we just rented the last one. We don’t have that anymore.’ How disappointing.
Dean Barber: Right. When my kids were little, they used to love to go in there. We would also get popcorn and snacks, so it was like family movie night.
Bud Kasper: An experience.
Dean Barber: Right. But Blockbuster missed it—just like Kodak missed the digital camera. It caused major problems.
Defining Risk and Investment Loss
Let’s go back and define good fear versus bad fear. To do that, the first thing that we really need to do is to define risk. If we go to Webster’s Dictionary, it says, “the chance that an investment will lose value.” Then, Webster’s definition of investment loss is, “the amount by which the purchase price exceeds the selling price or the decreasing amount or magnitude or value or degree.”
If you look at those things at face value and you look at risk and loss, a lot of people are fearful of the risk and loss. We need to ask if we worried are about the right things.
Bud, we know after almost 80 years combined in this industry that the real risk that a person faces in their life is the risk of not living a full life the way that they wanted to live it. It’s not the up-and-down values of an account on a daily, monthly, quarterly, or annual basis. It’s the risk of losing things that are far more important in our life than money.
What’s the Most Important Thing in Your Life?
We have had so many conversations with people in this industry over the decades. I can’t think of more than one or two people that said that money was the most important thing in their lives. And those people were fairly shallow individuals. Just stop for a minute and think about the most important thing in your life. Is it really money?
Bud Kasper: No.
Dean Barber: Probably not. Money becomes how you get to do some of the things that are the most important in your life. At the end of the day, money should never be the most important thing in your life. If it is, then you have a greed problem.
Bud Kasper: Right. That’s where fear comes in. Look at James Michael Tyler, who played Gunther on Friends. He just died at 59 from cancer. You don’t know what’s going to happen to you. You can take good care of yourself and everything else, but suddenly this wildcard comes out of nowhere and changes everything from that perspective.
If you get tied up on the money part of it, you’re going to be missing out on things that you really want to have in life. As we’ve discussed so many times, creating memories is the most important thing.
10 Things We Value that We Can Lose Due to Fear
Dean Barber: There’s no question about it. So, what is it that we’re afraid of losing? Let’s talk about 10 things that we all value that we can lose due to fear. These are not in any specific order.
- Loss of time.
- Loss of confidence.
- Loss of control.
- Loss of experiences.
- Loss of opportunities.
- Loss of trust.
- Loss of love/companionship.
- Loss of self-worth.
- Loss of lifestyle/living your life.
- Loss of the use of your money.
Before we ever start making any kind of recommendations of what a person should do from a financial perspective, we have a process we go through using our Guided Retirement System. We call it a prioritization exercise where we have a lengthy conversation about what’s most important to you.
What’s important to the husband, what’s important to the wife, and what are the most important things to you as a couple, if in fact you’re married. If you’re single, then it’s what’s most important to you. We then get to an understanding that from the day we’re born that we only have 36,500 days of life on this earth if we live to 100.
According to the CDC in 2018, life expectancy was 76.2 years for males and 81.2 for females. If you extrapolate that out—especially if you’re turning 60, 65—take those number of years divide it by the number of days. Then, ask yourself the question: Are you really doing the things on those days that you have left that are the most important to you? Or are you spending all your time needlessly trying to control things that are completely out of your control, such as the random daily movement of the market?
Eliminating Fear with The Guided Retirement System
What we try to do for you is provide some clarity through our Guided Retirement System. Based on what you want to do with the days that you have left and how much you want to leave behind, this is how you should position yourself. This is how you should claim your Social Security. These are the tax advantages that you need to take advantage of today to take less risk with your overall investments.
That clarity gives you more confidence. You’ve got to be educated to do that.
Bud Kasper: With the loss of self-worth, which I think probably happens more with men than women, some people are so career oriented that their entire life is built around their profession and the position they have in business. Within the next year, you’re going to have a podcast with one of our clients that talks about stepping into the role of a retiree—throwing off the cloth, if you will, of being a business professional—and how to make those adjustments.
Dean Barber: No doubt about it. We have all kinds of education for you, including a couple of great videos: Retiring with $1 Million and Retiring at Market Highs. We also have an article titled, Don’t Miss Out on Your Money: Redefining Risk Management, which was written by one of the partners, Shane Barber.
I want to talk more about the number 36,500.
Bud Kasper: That’s a good number.
Dean Barber: That would put us about 700 points above where we are on the Dow Jones Industrial Average, but that’s not the number I’m talking about. That number is highlighted Shane’s article. It’s a long, but excellent read with a lot of great information.
Bud Kasper: It is a good read.
Good Fear vs. Irrational Fear
Dean Barber: One thing Shane talks about is the number 36,500, which represents the number of days that we have on Earth if we live to 100. When we talk about good fear versus bad fear, we might also talk about good fear versus irrational fear.
Don’t Let the Fear of Running Out of Money …
I want to tell a quick story about irrational fear. To some degree, we see a lot of people that have these irrational fears, most of which are based on life experiences. The story I have is one about a couple in their 60s with no kids. The husband was a very successful business owner and sold his business. He had this fear of running out of money because he watched his father lose everything twice.
He told himself, “That will never be me. I will never experience that.” That fear of running out of money ruled his decision making when it came to what he would allow for him and his wife to do. It was so much so that this guy didn’t ever want to spend more than like $7,000 and $8,000 a month.
Keep in mind that he had sold his business, so he’s bringing in a little more than $100,000 a year from his business sale for a 10-year period. He’s also got his Social Security and his wife’s Social Security, which combined were about $65,000. He had more than $200,000 a year coming in just off those things. What’s more, he had investments in real estate and things like that are valued at about $20 million. This irrational fear of not spending more than $7,000 to $8,000 a month was causing a great deal of friction between him and his wife.
… Override the Value of Life Experiences
This guy was not in the best health and his wife was recovering from breast cancer. When we did our prioritization exercise, she talked to him and said, “The one thing that I think that we should do is go somewhere warm for the winters.”
He didn’t think they could afford it, but I showed them they could. I asked him what was most important to him. He said his wife, so I just said we should talk about what the reality is. I explained to him how much he could spend if he lived to 100 and never made a dime on his money and stuffed it all under his mattress, it was like $40,000 a month. He could spend that much and never have to worry about running out of money, even if he lived to 100.
We knew because of his health that there was no possibility that him living to 100 was going to happen. He had never let himself think about that because he was so focused on never running out of money. He just wanted to make sure that his nest egg got bigger since that gave him a sense of security. When it came down to what was important in life for them, it wasn’t the nest egg; it was doing the things that they wanted to do.
I know this is an extreme example, but at some level, we see that happening all the time.
We Are What We Experience
Bud Kasper: It comes down to something that I’ve always said, and that is, “We are what we experience.” And in this gentleman’s case, it was the experience that he watched his father go through. It impacted him so significantly that he wasn’t going to allow it to repeat. That’s where the fear comes through.
If you amass that much money in savings, are a logical person with any kind of math skills at all, and came in and challenged your thinking about worrying of running out of money, most certainly you could rationalize your way back into a comfort zone. Sometimes people need help in doing that.
Quite frankly, there’s no better way to do that than creating a comprehensive financial plan that takes in every consideration of every aspect. That’s what our Guided Retirement System is all about. Until you’ve had that experience, you’re not going to know what we’re talking about. It is a wonderful experience.
How This Concept Led to Barber Financial Group’s Founding
Dean Barber: It is. When you talk about you are what your life experiences have been, that hits home for me. Many people have heard me tell my story about my passion for this business and why I started Barber Financial Group years ago. The catalyst for that was my grandfather.
I watched him retire. He said to me the day that he retired, “Grandson, I’ve got enough money to live until I die. Me and your grandma should be able to live the same lifestyle we’ve been living when I was working.” I’m like, “How do you know when you’re going to die?” He said his dad lived until 76, and he figured to be about the same. That was reasonable at that time, but then I watched as he eclipsed 76 and ran out of money. He lived to be 86 and had to move in with my mother.
The Fear of Losing Independence
I watched his dignity decline. That’s the risk. So many people are fearful of losing their independence. They’ll come in and visit with our CERTIFIED FINANCIAL PLANNER™ professional as we go through their planning process. We identify the things that are important in their life and what truly they want to accomplish.
Then, we measure that against all the resources that they have. A lot of times, we have people doing more than what they ever imagined that they could do because they get that permission slip. We show them what their money needs to do for them to accomplish all those things. We explain the reality of that happening, and the probability of success of it happening. While may have to adjust along the way, they still have that permission slip to live that one best financial life that they’re looking for.
Understanding What Your Money Can Do for You
Bud Kasper: That makes it even a more critical for people to understand exactly what their money can do for them. When you look at what your grandfather said, that really touched me about losing his dignity. Anyone who has worked wants to live under the conditions that they’ve taken care of themselves and their family, and therefore should be able to continue to do that.
When he lost that, I can see how negatively impactful it would be. I imagine it was probably difficult for your grandmother and for your mother to try to bolster his ego and say everything is going to be fine.
Dean Barber: As I began immersing myself into the educational process—the things that we do here—and trying to teach others about it, I found something even more disturbing.
Bud Kasper: What was that?
Dean Barber: There were people that had the financial resources to do all these things, but they didn’t do them because they didn’t have the clarity. Their adult kids that are in their 60s would come in and say, “I didn’t have any idea mom and dad had this kind of wealth. They always acted like they never had a dime. They never would take a vacation or do anything.”
Bud Kasper: They would live like a pauper.
Dean Barber: They wished their parents would have had some guidance on what they could have done because they would have much rather seen them enjoy it than inherit the money.
I’ve saved for my life to get to where I’m at. Now I’m witnessing it on the other end. You get both sides of the spectrum. That’s why we created the Guided Retirement System, which is like a GPS for your overall retirement.
What Are You Afraid of?
As we assess the differences between good fear and bad fear, it’s important to ask, “What are you afraid of?” Bud and I receive a wide range of questions that relate to fear. Many of those are what-if questions.
- What is inflation really going to do, and how’s that going to impact my standard of living?
- What if the Fed starts to raise rates?
- What if the Fed increases the rate of tapering?
- What if social security goes away?
- What if these tax hikes go through?
Here’s the reality of the world that we live in today. There are always unknowns. It’s no different than the world we lived in 50 years ago. We are both students of the economy and financial markets. We can go back to every decade since records have been kept and see that there was uncertainty, unknowns, and black swans. Yet through all of that, people survived. The people had good plans thrived in those times.
Inflation Is a Fearful Thing
Bud Kasper: Exactly. Inflation is a fearful thing. We’re going to see the results of that coming up with Thanksgiving. I understand the cost of turkey is going up rather significantly since the distribution system in the United States is so broken.
Dean Barber: I heard a deal that the actual turkey permit to go out and hunt a turkey is cheaper than buying a turkey.
Bud Kasper: Is that right?
Dean Barber: I actually have no idea. I just figured you might see more hunters out there this year trying to get that Christmas or Thanksgiving turkey that way.
Bud Kasper: That’s the one thing you eat that is actually inflationary.
Stress Testing the What-If Scenarios
Dean Barber: I think of those what-if scenarios much like a pilots thinks of their checklist. What if this happens? What’s my next step? That’s how we designed The Guided Retirement System. Its purpose is to help people get to and get through retirement on their own terms, and with the lifestyle that they want. For it to work, we build in these what-if scenarios. We call that stress testing.
When you ask these questions, they can have a very definitive answer for your own personal situation, but it’s only after the financial plan is created. In addition to some of those what-if questions I posed earlier, consider some other what-if scenarios that could affect you. What if there’s an early death? What if you or your spouse goes into a nursing home?
Take all these what-if scenarios that are on your mind and put them into your plan to determine what your plan will look like. These are the sacrifices or trade-offs that you would need to make to have the life that you want if these scenarios play out.
How Do You Mitigate the Risks?
Then, what are the strategies that we could use to help mitigate that risk? Start applying those scenarios, but you only do that once you’re working with a CERTIFIED FINANCIAL PLANNER™ professional that understands how to put that entire process together for you. That’s where the clarity and the confidence come from in a person’s ability to do the things that they really want to do.
Bud Kasper: I agree. A lot of this is cyclical in nature. It appears in how we are. If we’re going to have a spout of inflation come in, people will ask how much it’s going to attack them? That depends on how you attack the problem.
Let’s say you suddenly have gains in your portfolio and decide to play it safe. You can take some of those gains and put them aside as additional funding for your income that will stretch your income security from two to four years.
Guess what? Something’s going to cycle through in that case. Inflation, which could be a fear today, may not be a fear in four years.
Dean Barber: If you played your cards right over the last couple of years, you probably have created somewhere between seven to eight years’ worth of a needed return to fund a retirement. Based on what’s been going on in the last two years, you’ve probably created seven to eight years’ worth of that income if you just lose the greed. Let’s just say it’s there and put that aside. What does that do to your psyche about the fear of all these other things? It alters it drastically.
Harvesting Is a Good Thing
Bud Kasper: Yeah, and you’re exercising discipline along with your strategy for your retirement income needs. It’s no different than what we’re in right now with Halloween coming up tomorrow. What do we have? We have the fall and with that, what are the farmers doing? Harvesting. Harvesting is a good thing. There’s nothing more fun than taking the fruits of your labor. What did you accomplish or accumulate? Realize those accomplishments and put them into a format to add another brick into that security wall that you have for retirement.
Dean Barber: I love that analogy. The difference between that analogy and the analogy of the market is that you can tell when the crop has finished growing. You know when it’s time to harvest. When you’re in the market, you don’t know when it’s time to harvest. That’s where the discipline comes in. You apply that discipline in the creation of the plan.
It’s not something you’re going to guess at or do based on emotion. It’s something that must be built into the discipline of the plan.
Bud Kasper: What can we do about that when we’re sitting down with somebody and going through this in tremendous detail in terms of tax effects? Obviously, we get paid for the services that we provide to our clients. But when we see the benefits that will never be utilized without our expertise, that’s where we can give our clients more confidence and control.
Education Is Essential
Dean Barber: That’s what it’s all about. We’re here to educate you. It’ll do a couple of things. Number one, it’ll help you make better financial decisions. Number two, it will protect you from what we call the financial salespeople out there. Those are people that are just trying to sell you a product to make a commission. They’re going to try to convince you that their product is going to be the holy grail for your financial future. Don’t get that. Don’t be that person. Get the education.
Remember that we have a couple of great videos out there right now. Retiring with $1 Million is one of them. The other one is Retiring at Market Highs. You can also sign up for our Educational Series, which is a bi-weekly video educational program that we do. It’s web-based, so every other week you’ll get an invitation, know the topic, and can sit down in the comfort of your home to watch that video and get educated.
We also have a lot of great articles, like Shane’s piece, Don’t Miss Out on Your Money: Redefining Risk Management. And don’t forget the education we provide through The Guided Retirement Show™. It’s a podcast that is separate from America’s Wealth Management Show, where we get to dive deeper into a lot of subjects.
The bottom line is that the smarter you are, the better chance you’re going to have of making the right decisions.
An Optimistic Outlook
Another thing that happens here in the fall is that it’s typically the worst time of year for the markets. But I want to give my two cents here as we approach November and the holidays. I think we’re going to have a strong finish to this year. My prediction for next year is increased volatility. I still expect a growth phase, but a slowing growth phase economically through all of 2022.
Bud Kasper: There’s so many wild cards that are out there, no doubt.
Dean Barber: Thanks so much for joining us on America’s Wealth Management Show. I’m Dean Barber along with Bud Kasper. We’ll be back with you next week, same time, same place. Stay healthy and stay safe, everybody.
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The views expressed represent the opinion of Barber Financial Group an SEC Registered Investment Advisor. Information provided is for illustrative purposes only and does not constitute investment, tax, or legal advice. Barber Financial Group does not accept any liability for the use of the information discussed. Consult with a qualified financial, legal, or tax professional prior to taking any action.