I recently did an article on how fear holds us back from financial prosperity in particular how fear holds us back from tacking action. Yet, fear also is used in marketing. In marketing, fear is used to get people to take action by buying their (financial) product. The act of buying though is shifting responsibility and future action from the buyer to the seller. Thus, fear is still holding the person back from taking future action by transferring responsibility to the seller. The belief is that the financial expert can do a better job with your money than you can.

I am not saying that all financial products are sold by fear or are all financial products are bad. Yet, as consumers, we need to do a better job in investigating the products. It is o.k. to shift responsibility to a financial expert, yet do not shift your responsibility without doing your own due diligence.

For example,

• Variable Annuities – are typically sold out of fear of taxes and retirement risks. Variable annuities are sold as a tax shelter where the investment grows tax free until the money is withdrawn. Yet, there are better tax deferred vehicles like IRAs and 401(k)s that many people are not maxing out before investing in variable annuities. In addition, some variable annuities are sold in IRAs, thus losing the tax advantage which is normally a selling point of a variable annuity. In addition, variable annuities usually have high fees and commissions that reduced or eliminated any advantages. For more see the end of an article about Prudential Variable Annuity Complaints for a list of articles about variable annuities.

• Financial Advice – are trying to distinguish themselves from others by making other advice sound “stupid” or “old school”. The message is unless you want to fear being led astray by other “stupid” or “old school” financial advice; you need to their book or personal advice for new and hipper advice. Unfortunately, this scare tactic does two things. One, people buying into their advisor’s mutual funds at higher fees with no assurances that advisor’s future returns will beat the market. And, people are becoming more skeptical of financial advice because everywhere they turn, someone is giving them different advice by saying someone else is wrong. So who do you believe?

• Retirement – has a lot of fear of having enough to live on. We want to retire earlier and earlier while living longer and longer. Thus, we need a lot of advice on how much we need to save to live on. Yet, if we realize that retirement is relatively a new concept (in the last 50 years), we can see that many had to work in their “retirement years” before this (see Retirement Age). There is a lot of stigma on needing to retire early (to escape the workforce) that people feel like a failure if they did not save enough. And, many will try to retire even if they do not have enough. And, it is from this fear that people are trying to jump on the newest fad (home ownership, rental property, self-employment, etc.) hoping that this is the trick to be have a happy and secure retirement.

• Scarcity – is affected by the belief in a limited supply. Thus, people base their decision of getting it before it disappears. This can be seen with joining the band wagon of latest financial security boom (tech boom, oil stock boom, etc.). You need to buy in before it is too late. It is also seen with oil and gas prices. There are large variations of prices because people buy thinking that the supply will run out. Yet, after 40 years of hearing that oil running out, there are still new supplies being discovered every few weeks. Then why are prices so high? Fear and producers controlling supply (just like the diamond industry).

So what can we do? Remove the idea of scarcity and need. When we believe in scarcity, we hold onto what we have tighter and believe that we have no control. If we believe gas is a scarce resource, we will not let go of needing it. If we had just changed our driving habits for 1 month when gas hit $2, OPEC and oil companies would have been forced to drop their price. Yet, we said that we can not have enough gas and kept on driving as much as we always did. As a group, we did not jump on mass transit or drive slower (to save gas) to flex our muscle. We acknowledge the need and scarcity of gas and did nothing except complain and fearing higher prices. Thus, we just kept on buying gas hoping someone else would solve the problem. No wonder, gas prices went to $3, because it could.

Best advice on fear – Trust your instincts. If you are driven by fear of what may happen, take a step back and do research. If fear is driving the decision, then you are more likely to make a wrong decision. For example, one of the biggest investment mistakes is selling low (after a drop in market price) and buying high (joining the band wagon late) based on fear. So, do not make a rash decision based on what has just happened or what may happen. Do your research. If your research shows promising results and your fear has dissipated, then go ahead and buy (or sell). Yet, do not let fear drive the decision.

This entry was posted on Friday, September 8th, 2006 at 8:25 am and is filed under Energy of Money. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.