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]