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Writing for Kiplinger.com last month, Erin Burt laid out some tips to help conquer your fear of investing. This article is specifically aimed at those who are nervous about getting started in the stock market. She writes:
The thought of possibly losing any money is a terrifying prospect. And the fact that today’s economy has seen better days probably isn’t helping those fears. Investing in the stock market has its risks. But if you give in to fear, you’ll pass up some incredible opportunities — ones that come with big dollar signs attached.
Now is actually a good time for young adults to bite the bullet and get started investing. Think of the market downturn as a clearance sale: It’s a good idea to go shopping before prices climb again. Bottom line: Surrendering to fear only holds you back. If you want to get ahead financially, you’ve got to invest in your future.
Burt lists five common fears of first-time investors and explains how to conquer them. To paraphrase:
- If you’re afraid of losing all your money, diversify. Don’t put all your eggs in one basket. Instead of buying individual stocks, buy mutual funds. Instead of mutual funds, by index funds. In theory, the more diversified your portfolio, the more even your investment performance should be.
- If you’re afraid of investing at the wrong time, use dollar-cost averaging. Instead of trying to time the market, make regular, scheduled investments in the vehicle of your choice. With dollar-cost averaging, you’re essentially diversifying through time.
- If you’re nervous about the roller-coaster ride of the daily stock market, ignore your investments. In Why Smart People Make Big Money Mistakes, the authors note that it’s dangerous to watch your investments every day. When you pay close attention, you tend to become emotionally invested in even small movements. You lose sight of the long-term and make decisions based on short-term events. Peek in every month or so, but don’t constantly check your investments.
- If you don’t have the time or the knowledge to pick investments, use index funds. A portfolio of index funds is easy to put together, and you can rest comfortable knowing that your money is probably earning around the market average.
- If you need money in the near future, then pick your investments accordingly. Actually, notes Burt, everyone should set goals for their investing. You should invest with purpose. Select your investments to reflect those goals. If you need your money in the next few years for the down-payment on a house, or for retirement, then choose lower-risk investments like certificates of deposit. If your time horizon is long-term, then take greater risks.
I’ve found that the best way to overcome a fear of investing is simply to become better educated. If you’re a novice, pick a good book on the subject (such as The Bogleheads’ Guide to Investing). Research the stock market’s long-term performance. The more you learn, the more you understand the possible risks and rewards of each investment, the happier you’ll be.
[Kiplinger's: Conquer your fear of investing]
This article is about Basics, Investing Thursday, 3rd April 2008 (by J.D. Roth)
April 3rd, 2008 at 5:19 am
Robert Allen’s Multiple Streams of Income has an entire section devoted to dollar cost averaging and index funds and how they can help you reach financial freedom (among other vehicles of course) and this is what sold me on the value of that investment technique. I think he called it Financial Success For Total Idiots or something like that.
Powerful stuff!
April 3rd, 2008 at 5:54 am
Very good post! The second tip I especially agree with. I would also add that it’s a good idea to use a site like Virtual Stock Exchange and to set up your own game before entering the stock market if you plan on investing in individual stocks. Practicing with fake “money” helped me gain a lot of confidence before actually taking the plunge and investing real money. It also helped to really show me that while I can lose money some days, I never lose ALL of it.
That extra boost of seeing that my fake investments were in the green helped me tremendously in taking the steps to invest real money.
April 3rd, 2008 at 6:32 am
Thanks for your blog, its been very helpful. I would like to know which online trading site is the most responsive, and affordable? Have you come across any comparisons or recommendations?
April 3rd, 2008 at 6:42 am
I use sharebuilder to invest. Though I am afraid all the time of stocks, I know the market is low now and it is a great time to invest. My suggestion is to keep checking stocks ups and downs, do regular checks on companies and build your confidence up.
Start small and give yourself a limit. I limited myself to 4000, but lately been itching to add more. It still makes me scared, but I know the current situation is a good time.
April 3rd, 2008 at 7:08 am
I had my pops read “a random walk down wall street”. Being an academic, he couldn’t stand to read the ‘dumbed down’ (his words) personal finance books.
He’s more worried about inflation than investments now, so I think he’s caught up.
April 3rd, 2008 at 7:09 am
A relevant story from this morning’s Morning Edition:
Yale Money Whiz Shares Tips on Growing a Nest Egg
http://www.npr.org/templates/story/story.php?storyId=89324244
April 3rd, 2008 at 7:55 am
I want to chime in about ‘Why smart people make big money mistakes’
About a year ago I was in the library trying to find a personal finance book because I kept feeling like my money was out of control. I saw this book and the title really grabbed my attention.
This book looks at personal finance from a Behavioral Economics perspective and if you know nothing about this field it will be very helpful. They discuss the way our natural behavior leads us astray when money is involved. An example that applied to me- one of my relatives gives me money somewhat often, call it $100. I would treat this money differently than $100 I had earned and it was inevitably spent without thought. This makes no sense because it is still $100 . This is an example of valuing money from different sources differently. There are many ideas in this book that helped me understand why I could never hold on to money and I have since been able to devise a system that, among other things, makes sure I value every dollar the same.
I highly recommend this book if you are interested in how normal human behavior can cause financial problems without you even noticing. After all, being smart and studying investing wont help if you don’t realize you are making decisions based on your gut reactions, and not what you spent all that time learning
April 3rd, 2008 at 8:17 am
Also it helps to have all your other ducks in a row. If you have a managable mortgage, and no other debt (credit card, student loans, car, etc), plus 6 months of living expenses in the bank - it makes the idea of investing much easier because you are financially stable. Too many people invest with money they need - investing in the stock market should be with money you won’t need for at least 5 years. This way a downturn in the market doesn’t scare you away cause you have 5 more years to make it up.
I should also point out that you will make mistakes - you can’t avoid them. One of my first investments lost 50% in a couple of months (APOL). However one of my other first investments netted me a 250% return in a couple of years (AZO). Both were bought on intuition instead of good sense and homework - I’ll never buy like that again, but it just goes to show how you can make mistakes and you can get lucky - its part of the learning process.
April 3rd, 2008 at 8:20 am
I work and communicate with a lot of traders and investors on a regular basis, especially new ones just getting into the markets. One of the things you should avoid doing on general principle is to play the markets in a fearful state of mind, afraid to lose money. That tends to lead to bad decisions - ones that often lead to getting out of the market at the worst possible time.
Education is definitely a great way to calm one’s fears. The more you know about investing and how the stock market works, the more calm you will tend to be when getting to the decision-making process.
Also, start with a small amount of money. Certainly you shouldn’t be using money you cannot afford to lose in the first place, but as you try to get your feet wet start with something even smaller. You will pay a tuition as you learn investing and the markets in the form of mistaken losses and things like that. Might as well do it with only a little bit at risk.
April 3rd, 2008 at 8:33 am
I totally agree with KC.
You shouldn’t invest until your are out of debt and have 6 months of living expenses in the bank.
By the way, 2008 is not a good year to invest in the stock market. The bull market that we are in is likely to continue this year and its hard to determine which companies will be going out of business because of the housing collapse and credit problems. For example, some investors thought Bear Stearns was at the bottom - and saw their investments reduced to zero just two weeks ago. This is why the money markets are record high, investors are afraid for good reasons.
April 3rd, 2008 at 9:28 am
What helped me the most was realizing that if I am too conservative, I still lose money, albeit slowly. Once I realized the power of inflation to erode my investments, I realized how important it is to invest some of my money in the stock market.
April 3rd, 2008 at 9:29 am
Something that should help quell peoples’ fear of investing is a company-matched 401k. My company matches half of my investment, up to 8% of my salary. So I’m getting an immediate 50% return!
For the meek, this is a way to introduce yourself to the world of investing while giving yourself some insurance against losses.
April 3rd, 2008 at 10:16 am
I’ve been thinking alot about this lately, and I definitely have “the fear”. I lost a good bit in the 2000 tech bubble burst, and haven’t done much in the market since.
This is good food for thought (along with your article yesterday giving investment charts). Thanks for the post, it gives me and old issue to ponder again. Reexamination is definitely a good thing.
April 3rd, 2008 at 10:27 am
IMO, people should be afraid NOT to invest. With cash sitting in a bank account, not only is it not growing, it’s shrinking after accounting for inflation.
The best way to ease people’s fear of investing is to get them to look in the long term (20+ years). Over any 20 year period, the stock market has never lost money. That is, if you index.
FT
April 3rd, 2008 at 10:33 am
Re: #5: I remember a quote from a UC-Berkeley MBA student around 1998 or so complaining that he had lost his tuition money for that semester IN THE STOCK MARKET. I sure hope he learned something in grad school, like not to put his short-term money in a risky investment, maybe!
Anyway, having been through the dot-bomb up close and personal (as in, working for a software startup in 2000), we invest carefully risking only what we’re comfortable with — it has to pass “the sleep test”.
I’ll have to crack my Kiplinger’s tonight — thanks for the pointer.
April 3rd, 2008 at 10:38 am
Sage advice indeed! I’ve also found that folks feel like when they invest on their own, they’re going it “alone”. But the truth of the matter is you’re not! The internet and the web have given you an endless community of other “go it aloners” that you can speak to for support, ideas, confirmation, etc.
At the risk of sounding like a shameless promoter, our site, http://www.tickerhound.com, is a perfect resource for advanced and even the most novice investors. You can ask questions and get answers from other investors on many different sectors and topics. It’s worth taking a look at.
Best,
Wayne
April 3rd, 2008 at 10:56 am
My first investing experience was when I opened a Roth IRA, so I agree with Drew that a retirement account can be a good way to get one’s feet wet.
And, because I am a little bit of a worrier, and my husband is A LOT of a worrier, dollar cost averaging and index funds are the way WE roll.
The good news is that with this measured approach we are beating inflation for now. We may never “wow” anyone with our great wealth, but we will always be comfortable and be able to do most of what we want.
April 3rd, 2008 at 12:41 pm
FEAR IS GOOD! It makes you THINK before jumping in. And who says the economic system we live in and take for granted we’ll still be here in a decade or two? Take a look at a bigger picture; the end of cheap oil, the global climate change, the structural problems in the world economy… Look at Japan. Who says that won’t happen to the US? A low market is not necessarily a good time to invest… but it is a good time to think about things like this.
April 3rd, 2008 at 1:48 pm
Thanks for these great tips. We’ve been saving as much as possible, but have been one of those apprehensive of investing. We’re thinking of starting out with a CD and maybe work our way up as we gain more confidence (and capital).
Tip #3 sounds like it would be the hardest part for me, but most relevant. It reminds me of my uncle who turns on the TV every morning to check his stocks and moans and groans all through breakfast. That can’t be good for the digestion.
April 3rd, 2008 at 3:30 pm
@Curt at PennyJobs.com: You need to be a little careful about your pronouncements.
Saying “2008 is not a good year to invest in the stock market” is a pretty string conviction to have, especially when you mix up bull and bear markets in the next sentence. Yes, things are bad right now, but not you, nor anyone else can predict where the market will go over the next year. What we can say with more confidence is that it will be higher in 10 years. By that metric, the right time is to buy now. Trying to time the market is a loosing proposition for a non-professional investor.
For what it worth, Bear never went to zero. Yes, it was a precipitous decline from 160 to 10 where it is now, but that is what diversification is for, even the best are wrong a large percentage of the time.
“investors are afraid for good reasons” When everyone is afraid that is when we have a bottom.
April 3rd, 2008 at 4:20 pm
That was a good read. I found it interesting it was written by a woman. I recently did a post on the difference between men and women investors - one of which was men were over-confident, while women exhibited doubts about their ability to invest.
I bet you can guess who is the better investor.
Best Wishes,
D4L
April 3rd, 2008 at 4:24 pm
Taking the plunge to investing can be hard. I remember having trouble knowing that my investments are not guaranteed to always make a profit. But if you make an average income, the only way to reach a retirement with dignity is through investment. Once you understand how investing works and how to minimize risk, you start to loose that fear. Plus, if you make it automatic, you don’t even think about it.
April 3rd, 2008 at 7:31 pm
Hannah:
Wow! Thanks for the tip on Virtual Stock Exchange!
April 3rd, 2008 at 8:58 pm
Great advice on investing! I also really enjoyed and got a lot of great advice out of Phil Town’s book on investing. (he has a few).
Thanks for sharing!
April 4th, 2008 at 2:33 am
Indeed, these are very valuable tips. Thanks for sharing.
As far as diversification is concerned I think having about around 5%-10% of your portfolio as gold is a good thing.
April 4th, 2008 at 3:37 am
not going to happen, my fear of investing is too great.
investing used to be about valuing a company based on its financials - which was good.
now investing is just groups of investors being led by fund managers who jump onto the latest investment bandwagon - which is bad.
it’s all a great ponzi scheme these days.
April 4th, 2008 at 5:43 am
[...] quoted well-know PF blog Get Rich Slowly in their short article on how to avoid big mistakes in [...]
April 4th, 2008 at 8:00 am
[...] is fear. Especially right now, fear of investing is running a little high amongst some. Over at Get Rich Slowly, there are some good investment strategies that can help you in overcoming your fear of [...]
April 4th, 2008 at 10:29 am
It’s better to be safe than sorry. Invest in debt free companies that are young and growing. Find that Berkshire Hathaway.. but the economy right now is not good..
April 4th, 2008 at 12:39 pm
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April 7th, 2008 at 8:55 am
Fantastic post. We cited it in our Sunday Review #14 as one of our favorites.
Keep up the excellent blogging.
Cheers,
FIRE Finance
April 17th, 2008 at 12:11 pm
Well I’m both scared and excited. I bought $2000 into my first Index Fund with $100 Biweekly contributions.
Now to hope the world economy doesn’t tank!
April 27th, 2008 at 12:42 am
Dollar cost averaging only makes sense if you are investing small amounts over time, e.g. 10% of your salary. It is a poor strategy if you are investing a lump sum - just invest it all at once, you will save a lot of money on commissions and you will get higher returns from having had your money in the stock market for longer.