Why invest? In life, you can get income from only two sources:
- your work (in a job or business)
- your investments
Most people start at No. 1 and work their way to No. 2. It's what J.D. did, and he's been at No. 2 (gaining his income from investments) for a while now. Getting rid of debt, being frugal, and saving all are elements of our strategy to move to No. 2, whether we articulate it as such or not. Despite a few mishaps, that's where I am too (albeit not in J.D.'s class).
Only at No. 2 do you obtain the freedom to pursue your dreams to the max.
Here's a paradox, though: If investing is such an obvious thing, why are we still talking about it? For some reason, many people still haven't made peace with the notion that investing isn't optional. There was a time when I hadn't, either.
Someone asked me recently why I took so long to get started with investing. After all, I had a financial education, and I should certainly have known better. Being as good at rationalizing as the next guy, I weaseled my way out of the embarrassing question, but I spent a long time thinking about it — and I started asking others why they were not investing. The number one reason I heard came down to fear.
What I was afraid of, and what most people who aren't investing are afraid of, is:
- fear of failure (emotionally: I don't want to look like an idiot)
- fear of failure (rationally: I don't want to lose money)
- fear of getting taken (for a ride, or for a fool)
- fear of being exposed as unintelligent when I don't get it.
Example: A friend (under 30, making “young money”) recently told me she was going to get an unexpected inheritance from a grandmother everyone took for someone who just got by. Her grandmother must have been a closet Get Rich Slowly reader, because she lived frugally and left an estate with way more zeroes than anybody expected. I asked my friend if she was going to invest the windfall. To my surprise, she wasn't even considering investing it. Why not?
It turns out that she was afraid she'd lose it. Fear was the barrier stopping her from reaping the benefit millions get every day. But should she be afraid?
To answer the question, look at two things you do every day which carry the risk of loss or failure — working at a job and driving. You can lose serious money at both, and yet you do them with hardly a thought to the risks.
So why is that the case? Knowledge.
You have learned how to drive and how to work. Driving is straightforward; work, less so. Apart from the technical skill, there are many subtle, yet important, skills like negotiating the ever-present office politics. Learning successful work skills takes a long time, and we all make mistakes along the way. Some are costly, but others are just fodder for a good after-dinner laugh.
But none of us opt out of work because of the mishaps and mistakes, or because an acquaintance lost her job, or we read in the media of mass layoffs. However, many don't invest because of those very same reasons — we heard someone lost money somehow.
How do you overcome the fear of losing all your money?
1. Pick your investment
Stocks and mutual funds are not the only things to invest in, even though that's all you hear these days with the Dow hitting record highs. The list of alternative investment opportunities is long. Here's an excerpt:
- Savings accounts
- CDs (certificates of deposit)
- Real estate
- Stocks, or equities
- Precious Metals
- Mutual funds investing any or all of the above
- Private businesses
Some of these alternatives are very safe, such as CDs and savings accounts. Bonds can be safe too, if you hold them till maturity. The chances of losing your money in a CD are pretty remote.
What's that I hear? The return on those investments is lousy? You're right. You said you wanted a safe investment. You didn't say you wanted an investment with a high return.
Alaska is huge and doesn't have many roads. As a consequence, the largest state in the union has a small army of what they call bush pilots, flying people and stuff to all manner of remote locations, in almost all weather conditions. Alaska is notorious for some pretty bad weather … not a pilot's friend. They have a saying in Alaska: There are old pilots and there are bold pilots, but there are no old, bold pilots.
The same is true of investments. There are safe investments and there are high-yielding investments, but there are no safe, high-yielding investments. If there were, people a lot smarter and richer than us would have sniffed them out and written a book about it.
The point is: If safety is your only concern, you have viable alternatives to choose from.
Your job has risks, and driving has risks. You reduce those risks by learning. If a particular stretch of roads attracts cops, you learn to watch your speed on that stretch.
Likewise, you can reduce your investing risk significantly by understanding investing fundamentals. It's not cleaning tables, but it's not rocket science either. If millions can do it, you can too.
The good thing about learning about investing is you can do it before you actually have dime one to invest. The more you know, the more you're aware of the obvious traps and pitfalls, and the less afraid you become. So, when the day comes when you actually do have money to invest, knowledge will have replaced fear … like it usually does in other things too.
Knowledge is power. With the Internet, knowledge these days is freely available. Fear of the unknown is understandable, even rational. But maintaining fear through maintaining ignorance, that's something different. That's deliberate.
Knowledge is power, and not to use that power is to rob your future self for no reason, especially when you can get that knowledge for free.
If you decide rental property is something which resonates with you because you're good with your hands and with people, then go for that. Become knowledgeable about rental income. Find out what makes the difference between success and failure.
Then, when you do have money to buy your first property, you'll know you've at least got the obvious mistakes covered.
4. Don't follow tips
We've all heard stories about a supposed sure thing, from horse racing to stock investing. Someone whispered to Debbie to buy Chipotle stock and, oh my, she's a millionaire now. Problem with that is someone else said to buy Circuit City stock, because it was cheap and we all know how that turned out. Tips are especially prevalent with penny stocks.
Can we just say it, though? Tips are good for restaurant servers, but not for investing. Investing tips are like movie stars: For every Julia Roberts there are 10,000 unknowns (parking cars and pumping gas, to quote the hit song from the '60s).
If stock investing is your preference, there are many well-publicized model portfolios out there which have yielded great returns with very small risk. All you need is a couple of hours, one Saturday a month, to figure them out and join.
The next step: Get ready
Your first concern at the moment might be paying off debt, and that's a good thing. But if that's your reason for not getting up to speed on your investing options, think again: When you don't have money is actually the best time to learn about investing. (You don't want to be a novice when you have real money to lose.)
Do you use the fact that some people lose their jobs as an excuse to not get a job or the many accidents as a reason to not drive? Probably not. So why use the fear of losing money as the reason to not invest? Especially when there are lots of free knowledge resources to overcome those risks. About a year ago, Lisa Aberle put together a great resource listing to get you started.
Millions invest successfully every day. How about you?
Are you an investor? In what do you invest? If not, are you utilizing this time to get up to speed with investing?
William Cowie spent 30 years in senior management (CFO/CEO) before retiring. He has a bachelor's, a master's, and a partial doctorate in management and strategy. Author of the book “The Four Seasons of the Economy,” William also assists medium-sized businesses in the use of the Four Season Strategy to help them capitalize on economic cycles. He runs two blogs: Bite the Bullet Investing (investing) and Drop Dead Money (the economy) and writes for several other blogs in addition.