For many folks out there, the word “investing” conjures up an intimidating picture: traders on the floor of the stock exchange frantically buying and selling stocks by yelling and waving their arms about. But while that does happen on a daily basis on Wall Street, that's not investing as we know and love it here at Investor Junkie. Let's see how to overcome fear in stock Trading so you can start protecting your wealth today!
In this Article:
There's No Need to Rush Into Investing
That last point is a particularly big one for us. We believe that investing in stocks should be about protecting your assets and steadily growing them over time. Investing is not about getting rich quick. It's about keeping your nest egg safe so that you can buy a new home… send your kids off to college… or even retire comfortably.
Those traders you see freaking out on the stock market floor? In large part, they're day trading, trying to turn a quick profit. And that is something we definitely do not recommend.
You see, when you are trying to play the ups and downs of the market at a moment's notice, you're opening yourself — and your hard-earned money — up to a whole lot of risk.
Instead, the kind of investing we recommend is a long-term process in which the shares of companies or funds you buy tend to go up over long periods of time. It's not about being glued to a Bloomberg terminal and betting your shirt on hot penny stocks.
So let's take a deep breath and address our fear of investing.
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 crashed or had a major drop in eight out of 18 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%.
On the other hand, 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 common fear of investing comes from losing a lot of money in the short term (like the 37% losses sustained in 2008). Instead, you should be more worried about 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 (CDs) that return about 4% over time. Compare the returns to a risk-embracing investor who 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:
Step One: Combat Your Fear With Knowledge
Human beings naturally fear what they don't know or understand. So let's learn about how the markets work.
Read about stocks, bonds ad mutual funds. Find out what fees and expenses are involved with different investment options. Learn about different simple investment strategies. Become an informed investor.
Step Two: Start Small
OK, first realize you're likely to screw up at the beginning. That's normal with just about anything.
So start small, if you're worried about it. Learn through experience how much you can stand to lose (this is known as your “risk tolerance”). You can even start with just pennies on the dollar.
There are a number of micro-investing services out there on the internet that can help you get started investing when you don't have a lot of cash to devote. One service we've reviewed is Acorns, which you can use to automatically invest your spare change. Stash Invest is a similar service and is now even offering Roth IRAs. (Note: Acorns is getting ready to roll out an IRA, too.). Here's a quick comparison of the two.
Read our full Acorns vs Stash comparison here.
Step Three: Refine Your Strategy
So what you were doing at first isn't working out. No need to panic!
It's totally OK to change your strategies if you realize you made a mistake early on in your investing career.
When you make up an investment portfolio, you want to take into account the amount of money you have to invest, your time frame and your risk tolerance. The ideal portfolio will have an appropriate asset allocation, taking all of these factors into account.
Robo advisors are among the hottest financial technologies to hit the market recently. And what's cool about them is that — for a fraction of what you'd pay a personal advisor — they'll create an asset allocation for you.
Betterment is our favorite robo advisor for beginners. It requires NO minimum investment and charges very low fees. And if your financial situation or needs change, your portfolio's asset allocation can change too. So there's no need to be frightened about goofing up or needing a new strategy. Get more info on Betterment's website.
Step Four: Commit to Long-Term Investments
Don't judge your own investment performance after only a month… or even a year. Stocks are long-term creatures and sometimes take a while to mature. Consider the cicada — an insect that spends 17 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.
Step Five: Don't Let Losses Bother You Too Much
And if you do lose your money… oh well. Since you're not investing the cash you need to survive tomorrow or next month, who cares if the markets take a temporary nosedive? If you're saving for long-term goals, you don't need that money for a decade or more. And remember, over the long run, the markets tend to go up. (Here's some more wisdom about handling market corrections.)
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.