05/09/2014 07:33 pm ET Updated Jul 09, 2014

Putting Fear to Work for Your Money

"Greed is good." That phrase was made famous by actor Michael Douglas playing financial lizard Gordon Gekko in Oliver Stone's movie, Wall Street.

That movie came out in 1987 when hostile takeovers and leveraged buyouts were becoming all the rage. It articulated an ethos that was starting to define American finance. While the movie is critical of the "greed is good" philosophy, many on Wall Street embraced it as a mantra.

Greed's nemesis is fear. Fear and greed are often said to be the emotional extremes that investors swing between. Greed has usually had the upper hand over the past couple decades, from over-hyping the dot-com boom to fueling speculative bubbles in gold and oil to pushing risky mortgages to unsophisticated borrowers. It can be rightly said that greed had a great deal to do with the financial crisis of 2008 and 2009.

What about fear?

The question is, if greed has done such a lousy job as the muse of finance, could fear do a better job?

Here are four ways a dose of fear might be good for household finances:

  • Retirement savings. In the late 1990s, when Americans saw huge stock market returns send their 401(k) balances skyrocketing, greed was a big motivator for retirement saving. Just put a little money in and the stock market would carry you to great wealth -- or so went the thinking. Since then, the stock market has proven less reliable, savings account interest rates have dropped to practically zero, and confidence in having the money to retire has faded. Here's where fear should take over: While making 401(k) contributions no longer seems like a ticket to wealth, not making them is a likely ticket to impoverishment.
  • Debt. Federal Reserve figures show non-mortgage debt soaring to record levels. The greed element of this is obvious -- living beyond your means brings instant gratification. Fear might be more instructive though, because people who do not get debt under control will see their lifestyles come crashing down.
  • Investing. Both fear and greed are harmful to investors. They lead people to do the wrong things at the wrong phase of the stock market cycle. There is one form of fear that can be constructive though: fear of the unknown. If you do not know what you are investing in, how it makes money and why it is capable of producing a good return, then you should steer clear.
  • Home buying. Greed in home buying is when people see only the house and not the mortgage. Face it, houses have gone way beyond representing simple shelter. They are status symbols, and some people are willing to overreach just for the appearance of being successful -- even though it may not last. What you should fear when you sign on for a mortgage is not knowing how you will make each and every payment. This means that if you are not sure you can afford it, or if you are not sure how the mortgage works, then you should let fear be your guide and steer clear.
The problem is, investors do not tend to feel fear until it becomes an overwhelming, paralyzing emotion during crises. Instead of waiting for extreme fear, perhaps it would be better to temper greed with a healthy dose of fear on a day-in and day-out basis.
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