One common image used to portray “investing” is the frantic buying and selling, conducted in loud yells and spastic hand motions, on the floor of the stock exchange. The hectic rush of floor traders desperately trying to close out their orders before the bell rings at 4:00 PM sharp. Don’t let the stock market’s ups-and-downs dictate how you feel about investing for your future.
That fear of investing in the stock market isn’t what investing should be for most investors.
Investing is a long-term process where the shares of companies or funds you buy tend to go up over long periods of time. All of us are too busy with family, jobs, kids, and hobbies to worry about what’s happening on Wall Street at 3:59 PM.
But how can we avoid the fear of investing when there are these adrenaline-crazed traders trying to snatch our retirement funds and our kid’s college savings at the first opportunity?
Is the Stock Market Really Scary?
First, let’s look at how scary the market really is. Since 2000, the stock market, as represented by the S&P 500 index, has dropped in four out of fourteen years with annual losses between 9% in 2000 and 37% in 2008. The 37% drop in 2008 is about as bad as it gets. You’ll have to look back over 80 years to the pits of the Great Depression to find annual stock market losses worse than 37%.
However, over the last 80 years the stock market has returned an average of about 9% annually. Some years are really bad (that’s what we fear) but on average the long term returns are pretty good.
Understanding Your Investing Fears
The biggest fear of investing comes from losing a lot of money in the short-term (like the 37% losses sustained in 2008). The bigger fear should be reaching retirement age and not having enough.
Consider a risk-averse investor buying low-yielding but relatively safe investments like short-term bonds or certificates of deposit that return about 4% over time. Compare the returns to a risk-embracing investor that buys stocks that average 9% per year. After 30 years of investing $10,000 per year, the safe investor earning 4% will have $583,000 whereas the stock investor will have $1.486 million (more than double).
Investing in the market might be the only way to reach your long-term financial goals. The bond investor in this example may come up far short of their retirement goals due to being too conservative.
Tricks to Getting Over Your Stock Market Fears
Here are a few tricks to get you past the fear of investing:
- Combat fear with knowledge – Learn how the markets work. Read about stocks, bonds, and mutual funds. Find out what fees and expenses are involved with different investment options. Come up with a simple investment strategy (sometimes called an “Investor Policy Statement”).
- Make the leap into investing – You may screw up, and that’s okay. When you start investing, the amount you can lose is relatively small. Learn through experience how much you can stand to lose (your “risk tolerance”).
- Keep learning about investments and refine your strategy – It’s okay to change strategies if you realize you made a mistake early on in your investing career.
- Commit to long-term investments – Don’t judge your own investment performance after a month or a year. Stocks are long-term creatures and sometimes take a while to mature. Consider the cicada — an insect that spends seventeen years underground before emerging as a mature adult. Stock portfolios can sometimes take a decade or two to produce those long-term 9% returns. Let your portfolio sit undisturbed like the cicada if you want to see it grow to its full potential.
- Don’t let losses bother you too much – You are not investing the cash you need to survive tomorrow or next month, right? So who cares if the markets take a temporary nose dive? You don’t need the money for a decade or more if you are saving for long-term goals.
The fear of investing can be hard to overcome. No one likes to lose money, even if it’s just temporary. Making that first leap into the market is scary. But “it’s scary” is not a good excuse to avoid investing altogether.
Think about learning to swim. Plenty of people are afraid of drowning and avoid water altogether. It’s risky — you could drown. The truth is you don’t have to jump right into the deep end if you can’t swim.
Before you start swimming laps across the olympic-sized pool, you can first get comfortable floating and submersing your head in water. Then learn a few basic strokes.
Eventually you get comfortable swimming on your own and accept that the risk of drowning is manageable as long as you prepare yourself. Just like investing.