How close are you?

A short while ago, our readers were asked (talking about your personal financial journey) “What is the next step?” J.D. offered an answer in his 2009 article: the third stage is… investing.

Why?

Why invest? In life, you can get income from only two sources:

  1. your work (in a job or business)
  2. 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.

Why not?

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?

Should you?

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)
  • Bonds
  • Real estate
  • Stocks, or equities
  • Commodities
  • Futures
  • Options
  • 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.

2. Learn

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.

3. Specialize

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?

More about...Investing, Planning

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Money Saving
Money Saving
5 years ago

Great post – I’d say that the fear of failure is what also stunted my investing. I started out and had some really big losses by investing in single stocks during the market crash. From there, it took me a long time to get comfortable investing for the long term. Now I’ve seen the light and invest just as much as I can each month.

Sam
Sam
5 years ago
Reply to  Money Saving

And we really increased our stock market investments during the crash. I made some great purchases in the early spring of 2009 that have returned fantastic rewards due to the fact that I bought at the bottom. But we limited our individual stock investing to our IRA monies, so $5000 a year (not a huge amount).

Seth at Ectopistes
Seth at Ectopistes
5 years ago

Good job covering many of the common fears felt by those in a position to invest. I’d add inertia to that list as well. Sometimes a person knows that they should invest, and perhaps even what to invest in, but the simple act of signing up for a Roth IRA or investment account seems daunting. To those I would say just do it. Go to Vanguard’s or Fidelity’s website and just sign up. It won’t take but a few minutes and isn’t much harder than buying something on eBay. If you have any trouble at all give them a call… Read more »

Seth at Ectopistes
Seth at Ectopistes
5 years ago

Side Question: Does this site take a long time to load for everyone else? I just refreshed this page and it took over 10 seconds on a fast connection.

I fear all the adds are bogging it down.

Dave LaLonde
Dave LaLonde
5 years ago

Mine works perfectly fine! Maybe your browser?

Seth at Ectopistes
Seth at Ectopistes
5 years ago
Reply to  Dave LaLonde

Certainly slower in Chrome than IE

Carol
Carol
5 years ago

Yes, it takes forever. 10 seconds would be quick. I agree; I think it’s some of the ads. This seems to be worse on an old version of IE.

FI Pilgrim
FI Pilgrim
5 years ago

My next step is investing for sure, but only after I’ve paid off my mortgage, which should be December of this year. Can’t give up that peace of mind and guaranteed 4% return!

Adam
Adam
5 years ago

If you come across someone afraid to invest, point them toward Betterment.

Dave LaLonde
Dave LaLonde
5 years ago

Thanks for the post! I think you definitely touched up on the initial basics. Fear of failure is definitely the big one for me!

Mike in NH
Mike in NH
5 years ago

Not sure my path works for everyone, but a lot of us seem to focus on goals and steps so to that end this is how I started investing. 13 years ago I got my first real job out of college, and a day later I was on a new hire benefits call with HR completely overwhelmed by the thought of a 401K (my parents were not good with money, retirement, etc). I started out with a Fidelity Freedom Fund because it did the work for me. The fees are obviously a little higher, but it was a start and… Read more »

Sam
Sam
5 years ago
Reply to  Mike in NH

I’ve been investing in some marijuana stocks this year too. Yes, they are super cheap and it is a gamble, but with the trend towards legalization and/or medical research and treatment I think some will pay off.

Edward
Edward
5 years ago
Reply to  Mike in NH

You guys are gambling, not investing. New investors should definitely stay away from cockamamie penny stocks. 70% of people who “invest” in penny stocks lose everything. If you actually pass break-even and make money, it’s sheer luck. Might as well stick those pennies in a slot machine or go to the local Bingo hall.

Mike in NH
Mike in NH
5 years ago
Reply to  Edward

Not to pick a fight Edward, but isn’t most investing gambling? Aside from the most low-risk investments (savings account, CD, etc) there is always a risk of losing. I look at those stocks like this. If I invest $1000 in my company stock (a solid, fortune 500 insurance company) I can buy about 10 shares. I believe that the country is moving in a more liberal direction, which is very good for the pot segment. Are some scams, duds, losers, going to be out of business in a year? Absolutely. But for that same $1000 spread around 10 different pot… Read more »

Sam
Sam
5 years ago
Reply to  Edward

Certainly some of the marijuana stocks are a gamble as I put it in my post. But there are spin offs of blue chip companies doing medical marijuana research and production (with 22 states having legal marijuana that’s not a gamble but an untapped market). The medical marijuana company I invested in is up 52% since I bought it. But yes some of the grow light and dispensary companies are much more volatile and priced accordingly. But investing $500 in a penny stock, which happens to be up 14% since I bought it, isn’t a bad investment. Neither of these… Read more »

Ray
Ray
5 years ago

My fear of investing is completely different. I am scared to death of giving my hard-earned money to companies with unethical practices or whose services or products seriously impact the health of people and our environment. For example, I’m not interested in giving my money to Walmart (treatment of employees) or Tyson Foods (treatment of animals) or cosmetic companies (toxic chemicals in products) or fast food companies (contributing to the obesity epidemic). The list could go on and on. I would love some resources on investing in ethical and responsible companies, which I don’t see much discussed in online PF… Read more »

Sam
Sam
5 years ago
Reply to  Ray

I do a fair amount of my investment research on Fidelity’s web site and it does provide guidance and information on these issues. One of the best things that Mr. Sam and I did was to spend an afternoon at a Fidelity office (in person) learning all the ins and outs of their web site.

Babs
Babs
5 years ago
Reply to  Ray
Kent
Kent
5 years ago
Reply to  Ray

The list WILL go on and on. Name a publicly traded company or the product that they make and someone somewhere will find a ethical reason not to invest in it.

Aldo @ Million Dollar Ninja
Aldo @ Million Dollar Ninja
5 years ago

Great post. I was very afraid of losing my money in the stock market so I steered away from it. That was until a few years ago when I decided to learn about it. I realized that it was not that difficult to learn how investing works. True, I only invest in index funds at the moment, but that’s because I learned about the fees and how it has beaten most of the managed funds. We have to educate ourselves and once financially educated we can make more informed decisions. I decided to keep it safe while others might want… Read more »

Green Girl Success
Green Girl Success
5 years ago

My preferred investment vehicle is real estate rental properties because I am passionate about it and I feel that it also provides a value to others. I like that I can physically touch it and manage it and I only buy in walkable areas as risk management for rising gas prices.

Additionally, I have been lucky to cash flow quickly on my properties and use a line of credit (i.e. no money down). This way I can enjoy the money now and semi-retire at 40 rather than wait until I am 59 1/2!

Carla
Carla
5 years ago

Fear of failure and fear of loss is huge for me. Sometimes its difficult to know if my fear is real or not.

Ross Williams
Ross Williams
5 years ago

Most of us want more money in order to spend it. The reward of investing money now instead of spending it is that we will have more money to spend in the future. That is not always the best thing. When investing, your first step needs to be to ask how you would spend the money now and how will you spend the money you make by investing. Because that will help you evaluate both the wisdom of investing and that nature of your risk. If you want the money in the near future, then you will want to choose… Read more »

Edward
Edward
5 years ago

Precious metals and real estate (unless you rent it out) aren’t actually investing, they’re speculation. They’re objects. Sort of like buying comic books only on a grander scale. ..Or when there’s a shortage of Beanie Babies, Playstations, or whatever the current year’s Christmas fad is. You can’t calculate a proper ROI on them–you just buy and hope to God they go up in value. It is a form of gambling. Whenever somebody refers to gold as an investment, I say, “Nope–speculation. It’s not money at work. What’s the average ROI? Does the rock pay dividends? You might as well buy… Read more »

Alea
Alea
5 years ago

The problem I faced with how to invest, is that there are a lot of general investing books, but not what I would call a “Cook Book on Investing”. After reading these books, I finally feel like I can bake a good investment portfolio. How to Read a Mutual Fund Prospectus: A Practical Guide to Getting the Most Out of a Mutual Fund Prospectus, Lemke, Thomas P. Common Sense on Mutual Funds: New Imperatives for the Intelligent Investor by John C. Bogle (the one that turns the light bulb on!) The Bogleheads’ Guide to Retirement Planning The Bogleheads’ Guide to… Read more »

KC
KC
5 years ago
Reply to  Alea

Could not agree more re. Unconventional Success. David Swensen is brilliant, honest, straightforward and his advice has aged well over a few boom/bust cycles. If I hadn’t discovered that book I’d be 90 percent poorer now. His lectures are fantastic as well.

Steve
Steve
5 years ago
Reply to  Alea

Excellent list, Alea, and thanks much for sharing.

More books than are needed, I think, but in this case more never hurts.

My favorite on your list is the one by Bernstein. (His others too.)

uri
uri
5 years ago

we can’t all be investors… somebody’s got to do the work. investing means making money off other people’s work.

Steve
Steve
5 years ago
Reply to  uri

No, uri, investing doesn’t mean “making money off other people’s work.” It means employing whatever extra money you may have (after paying for food, shelter, etc) so it doesn’t lose its value to inevitable inflation. Happily, that money we invest becomes available to entrepreneurs. They use it to start companies that employ you, me, our neighbors. Some of that money becomes available to young families, enabling them to get a mortgage to buy their first home. Students borrow some of that money too, to pay for a higher education that will help them and society for decades to come. Governments… Read more »

A Frugal Family's Journey
A Frugal Family's Journey
5 years ago

We’ve paid of debt (everything but our house), have established an emergency fund for those inevitable rainy days, and now we are at the point where we are trying to invest every extra dollar we have in an effort to grow our net worth and become financially independent.

By the way, great article! I think you’ve covered the topic well. Cheers! AFFJ

Roger Marple
Roger Marple
5 years ago

The first step to investing is figuring out what type of investing personality you are: adverse to risk, a do-it-yourselfer would be goo investing in real estate and becoming a landlord, for example, rather than stocks.

Diane C
Diane C
5 years ago

To answer the original question: I’m there.

I’ve always been good at saving and avoiding debt, but investing, not so much.

One of things that made the most difference was finally hiring a professional. Now I am invested in a wide variety of market sectors via institutional shares and etf’s, with frequent rebalancing. The fees I pay have been earned back many times over.

You could say, through good habits, I got into the race. Using a professional helped me win the race.

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