Scared of Investing? How to Get Over the Fear

*This post may contain affiliate links. This means if you purchase through the link I will receive a small commission at no cost to you. It is the way sites like this are funded, but does introduce a conflict of interest.  

The fears we don’t face become our limits

Robin Sharma

Scared of Investing? But You Are Already Investing

If you have a superannuation account, you are already investing. Young people often don’t really think of super as their own money. But ignoring super will hurt your future self. Time passes quickly!

The graph below demonstrates compound growth of $50,000 at 6% vs 7% after fees over 40 years. The critical time to make sure you have your super working hard for you is in your 20s (when most of us ignore it!).

It’s time to invest a bit of time checking your super in the right place, invested in the right assets. By the time you have learned enough to sort this out, you have the knowledge to set up a simple portfolio outside super!

Scared of Investing? Don’t Forget Defence

A rule of thumb advice is not to invest money you will need in the next 5-7 years. You need cash available for emergencies. Being confident you do not need the invested cash in the short term will help early investors tolerate volatility.

What if an appliance or your car breaks down, or you need to take time off work for a health crisis? You don’t want to be withdrawing from investments, particularly during a bear market when prices are down. I wouldn’t be caught dead without an emergency fund, even though it’s frustrating to have to save this up once you’re itching to get started investing.

Scared of Investing? Educate Yourself

Learn enough to decide on a basic financial plan and asset allocation for your superannuation and stock market investments outside super. This is a reasonably small time commitment. Remember, reasonable and executed is almost always better than endless procrastination in the quest for perfection.

Knowledge tends to reduce fear a lot. Once you understand the benefit and ease of index investing using broad ETFs, you will have a better understanding of the actual risks and be able to assess this more effectively.

Think back to when you were early in your career. Was there a task that made you fearful that you are now confident and competent in?

What are the factors that help turn fear to competence and confidence? Can they applied to the fear of investing?

1. Practice in a low risk environment.

I’ve spoken before about micro-investing. Starting early, with tiny amounts of money lowers percieved risk and anxiety. Most microinvestment apps have a robo-advisor, making asset allocation simple (and as always, imperfect).

2. Mentorship

In an ideal world, we would all have a more experienced and knowledgeable mentor to share their experiences and coach us in real life.

An excellent professional financial advisor could fill this role, but they difficult to find. Selecting mentors (professional or otherwise) is probably the most challenging aspect though.

Even parents often give well meaning but bad advice based on no knowledge! A good rule of thumb is to use multiple sources of information and mentorship, so the inevitably biased information you recieve is hopefully balanced out by different views and approaches.

3. Familiarity

Repeated exposure to a situation inevitably reduces anxiety over time. The beginning of anything can be scary. If you can get started investing and get through your first few market corrections, fear should reduce (particulaly if you have performed all the steps above.)

If you don’t know where to start, Passive investing Australia is an excellent site, that can be worked through article by article over an (intense) weekend. Subscribe to this blog for ongoing education and (hopefully) inspiration. Subscribe to 1-3 podcasts or blogs with different investing approaches to get a more balanced education.

Scared of Investing? Assessment of Risk

People are terrible risk assessors. In investing you will come across most people at both extremes of risk tolerance. Many don’t have a good understanding of the risks involved.

At work, Colleague A may have a reputation as an investor, and brags about a crypto win. They are into a new fad each week and probably have little idea about any of it. They’re randomly throwing money at investments in the hope of catching a winner. There often seems to be very little strategy involved, and even when they do well, timing of their exit from the investment is often based on emotion. This is gambling, and is often the perception more risk averse people have of investing.

Colleague B when conversation turns to investing, states they are fearful of the stock market. These guys will probably make pretty good investors if they ever get round to learning enough. They’re not crazy risk-takers like colleague A. They don’t skip from one fad to another, racking up brokerage fees and tax bills all the time. They will likely research their options carefully and start by dipping a toe in. The biggest risk for colleague B is endless procrastination. Time is passing quickly!

Colleague C has been investing a while. They spent a weekend reading Passive Australia, and have signed up for a finance podcast and an investing blog to continue to grow their knowledge. They have made a basic financial plan, picked an asset allocation and found a low-cost online broker.

Their investment portfolio is growing year on year, and they don’t plan to enjoy the proceeds for a few decades. They don’t talk about investing much. There’s not a lot to talk about, and their style is nowhere near as entertaining as colleague A’s. They have chosen the easiest, lowest risk route in investing – dollar cost averaging into broad index funds forever.

Risk vs Volatility tolerance

Some of you may be wondering, if colleague C has chosen the lowest risk route, why are they not investing in property? Many people feel safer investing in property. It’s a physical asset they have far more experience with than shares. Property is less volatile, which often makes nervous investors more comfortable.

It’s a trap!

Volatility is often lumped in with risk but I see these two concepts as separate.

Volatility is short term risk and only relevant if you plan to withdraw your investments within the next 5-7 years, or you will panic if the price drops and sell when it happens.

Risk is the chance of actually losing your money. There is a common misconception that property always goes up. You can lose money with property as well as shares, but with property it’s more insidious. You may not even realise you are losing money for a few years.

I feel most people have a false sense of security around property. It feels more comfortable.

Most of my family and friends that have invested in property regretted it, despite statistics telling us property should have been a great investment over the same time period.

And yet I have chosen to become a property investor myself.

The big issues with property are

  1. Concentration risk – With hundreds of thousands of dollars invested in a single asset, choosing a dud property can be a disaster. You could invest this amount in a single share, but that wouldnt be very clever! A major advantage of the share market is the ability to diversify quickly and cheaply.
  2. Leverage – The vast majority of property investors will utilise leverage (ie a mortgage). This means a 10% gain or loss is increased by the amount of leverage taken on. Instead of investing $50,000 in shares and gaining or losing 10% ($5000), if that $50,000 is used as a 20% deposit on a property, a 10% change in property price would result in a $20,000 gain or loss. The magnified returns are attractive to property inevstors, but the magnified losses should be a warning to be absolutely sure the property selection is right.

Scared of Investing? Diversification

Not putting your eggs in one basket is an easy way to reduce risk.

No one can predict the future returns in any particular asset class. So the next 10 years could (and likely will) be completely different from the last decade. The shorter investment time horizon you have, the higher the risk a particular asset class will underperform.

When people are afraid of investing, it is often due to an idea they have to pick winning stocks, and may lose it all. But stock market investing has become far easier and more accessible over recent years.

Investors can now buy a simple index exchange traded fund (ETF) that exposes them to shares throughout Australia, or even the world. They can rely on a roboadvisor or make up their own asset allocation after some research.

The evidence is actually strong thaht this easy, lazy investing approach actually provides better performance than professionally managed funds most of the time. Some like the challenge of picking individual stocks, but most would start with a core portfolio of index ETFs.

Consider the Risk of Not Investing

Did you sit down and make that financial plan? You really need to give this a go, even if it’s not accurate and changes over time.

Are you on target to reach your goals? I would hazard a guess most people are not when they start out. I was always overwhelmed by the number of financial goals we needed to meet. We were never on target until this year, after a few years of investing to catch up.

What will you earn on your savings in your bank account? Check out how much your $70,000 balance will be worth in todays dollars over time. The graph below assumes inflation 2.5% interest on your $70,000 savings at 1%.

Inflation insidiously eats away at your savings. Taking small calculated risks to improve returns can help you meet your financial goals. Put the work in to make sure your super is working hard for you, and whether you need to invest extra.

Your wealth accumulation journey starts as soon as you make the first step. Subscribe to Aussie doc for a weekly email to keep you up to date on track to your goals.

Aussie Doc Freedom is not a financial adviser and does not offer any advice.  Information on this website is purely a description of my experiences and learning.  Please check with your independent financial adviser or accountant before making any changes.

Leave a Reply