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07 March 2023 12h05
Source: Banco Carregosa

Financial anxiety: what it is and how to avoid it

Financial anxiety: what it is and how to avoid it



An investor's worst enemy may not be the market. Find out what financial anxiety is, how to deal with it and how to avoid it. 


Little is said about financial anxiety, but it is a very common phenomenon. According to a study by the American Psychological Association done in 2022, nearly two out of three people believe that financial health is a source of stress that directly affects their physical and mental health. The problem can lead even the most experienced investors to make poor decisions and jeopardise years of investment. Find out what financial anxiety is, what signs you should watch out for and what to do to avoid it.


What is financial anxiety?


Financial anxiety is an intense, profound and persistent feeling of unease caused by the perception that one’s financial resources available are not sufficient or by the expectation of a negative investment performance. Even if reality does not objectively confirm this perception or expectation, there is fear through anticipation. Constant anxiety about accounts, investments and market behaviour can unbalance an investor's relationship with finances and make rational decision-making difficult. 


To a certain extent, moderate stress is beneficial. After all, anxiety encourages caution, which is essential to avoid rash decisions and imprudent investments. Fear of loss helps to avoid behaviour that leads to loss. However, when it reaches crippling proportions, measures must be taken to protect mental and physical health. 


It is important to note that financial anxiety is not a clinical diagnosis in itself. However, it is associated with many symptoms and behaviours, the closest being a generalised anxiety diagnosis. 


What are the causes of financial anxiety?


Although the causes of financial anxiety vary, the phenomenon tends to be stronger in times of economic uncertainty, such as the Great Depression of 1928. However, financial anxiety can be caused by many factors other than market instability. 


Firstly, events in the past, especially in childhood, can make someone more susceptible to this feeling. For example, those who have experienced severe economic instability or financial disputes may be more likely to suffer from financial anxiety.


In addition, the lack of liquidity in some types of investment can also trigger financial anxiety. Certain stages of life can place additional stress-inducing responsibilities on the investor, such as major changes in the family or business structure. It is also important to note that there may already be an underlying clinical picture of anxiety. Addictions, bipolar disorder, post-traumatic stress or depression can all contribute to poor economic management and thus lead to financial anxiety. 


What are the symptoms of financial anxiety?


Since financial anxiety is not diagnostic, the symptoms that can be used as indicators are those of general anxiety. Disproportionate, intense, profound and persistent worry is the key sign. The term "disproportionate" is important here, because if there is a real and objective risk of major losses, we are dealing with anxiety that is rooted in an unfavourable moment in life. 


Financial anxiety can be accompanied by muscle tension, fatigue, headaches, insomnia, dizziness and difficulty concentrating. In some situations it can even lead to panic attacks. In clinical terms, anxiety should be diagnosed by a doctor or psychologist, especially if it is disabling. Psychological support and medication may be needed.



How can you avoid financial anxiety?


There are several strategies that can be used to reduce and prevent financial anxiety and avoid irrational decisions. The main ones are described below. 


Know your investor profile


This is probably the most important piece of homework for an investor. What defines your risk profile is not how much you want to earn, but how much you can afford to lose. Sometimes, some investors underestimate their own risk aversion because they are excited by the possibilities that some investments offer. So the first thing to do is to know your own limits, set a maximum acceptable loss and stick to it. 


Review your investment strategy regularly


It is easier to deal with the challenges of the market when you have a defined investment and trading strategy. So plan ahead and adjust your approach over time until you feel comfortable with it. At the same time, avoid noise, information overload and reactive attitudes, otherwise you will be more prone to knee-jerk reactions. In fact, these factors are often at the root of contrarian decisions, such as investors buying high and selling low. 


Think long term


Savvy investors know the importance of choosing assets that appreciate in value over the long term. Knowing how to wait is one of the best ways to manage and avoid financial anxiety. Even stable assets can be subject to significant fluctuations due to negative economic cycles that can last for months or even years. To avoid losses, you need to give yourself enough time to recover your investment. You will be in a better position to manage your investments if you don't lose sight of the long-term time horizon and the reason you invested in the asset in the first place. 


Imagine the worst-case scenario



It may seem counterproductive, but imagining the worst-case scenario can reduce financial anxiety. It allows you to anticipate – and react to – a range of negative scenarios. For example, if you are over-exposed to a particular sector of the economy, you may find that it's time to diversify your investment portfolio to mitigate any negative impact. Planning and anticipating responses to challenging situations gives you a sense of control and helps reduce financial anxiety. 


Invest in yourself 


As financial anxiety is mostly an emotional issue, it is important to implement self-care habits. Exercising or taking care of your diet and sleep routine are important routines to keep your body and mind in balance. Also make time to do things that you enjoy and that help to reduce stress. These hobbies also help to improve serotonin and dopamine levels, making you feel less anxious. 


Delegate to a specialist


An effective way to manage and avoid financial anxiety is to seek the support of knowledgeable and experienced investment management professionals. Knowing that the selection of your investments and the management of your capital are being done by people with and in-depth knowledge of the market helps to reduce financial anxiety.  


Banco Carregosa, your best ally against financial anxiety


Financial anxiety can affect even the most experienced investors, especially in times of greater economic uncertainty. The Banco Carregosa team is here to help you define a personalised and resilient investment strategy. Take advantage of our extensive experience and sound knowledge to help you identify the assets that will best fit your overall investment strategy and portfolio. Contact us and optimise your assets without financial anxiety.