Investing is scary. There’s no doubt about it. Even seasoned investors feel something when they click ‘buy shares’ on their favourite stockbroker account. Their emotion is better described as excitement; a surge of adrenaline. Whereas the emotion which holds back many would-be investors is uncertainty and fear. This article will help explain how you could overcome your fear of investing.
Investing fears, when voiced, usually take three shapes:
- Fear of loss – you are afraid of losing money that you have worked hard to earn
- Fear of the difficulty curve – you are unsure where to start and don’t know if you’ll ever get your head around the topic of investing
- Fear of not making the right choice – with so many options ahead of you, you are afraid that you’ll live to regret the sub-optimal choices you made
In this article about overcoming a fear of investing, we’ll walk through each of these angles and explain why the fear is not well-founded and tips for navigating these natural responses to the uncertainties of investing.
Fear of Loss
Fear of loss is certainly the most prevalent among those who are new to the stock market. This is exacerbated by the media because stock market crashes are widely publicised, whereas stock market gains receive little to no column inches in the UK.
You’ll be familiar with BBC headlines such as “Global shares plunge in worst day since financial crisis” or “Pandemic crashes global stock markets”. But can you recall ever reading a BBC article entitled “Shares have risen steadily over the last two years”. No you won’t, and you can’t place much blame on the media for this absence. Stock market crashes simply happen more dramatically and suddenly than stock market gains.
As the following chart from Google finance shows, a price correction can take place within a few weeks. The recovery, by contrast, is a laggard and takes place over the course of a year. Therefore the positive days on the stock market simply aren’t very unique or newsworthy. It’s only when you step back and review the shape of the market over the course of a year that the positive picture emerges.
So in summary, it doesn’t surprise us to know that the public often connects the stock market with crashes more than anything else – even if the stock market actually rises over time.
We don’t want to trivialise stock market crashes, because they do happen and nobody finds it a pleasant experience to see their stocks & shares ISA balance shrink by 25% over the course of a month.
But if you want to invest for the long run and hold a realistic mindset, you could see them as a great buying opportunity.
If you suffer from great anxiety about losses from your current investment portfolio, this could suggest that you have been too aggressive with your asset allocation. Adding more equities to a portfolio will improve expected returns but adding more bonds will steady the ship. If you’re lying awake at night worrying about what your portfolio will do tomorrow, this suggests you need to tilt your weightings away from equities.
Do remember that the developed stock markets such as the UK and US have never ended a 25 year period down. A glance at the long term price charts of the FTSE 100 and S&P 500 will demonstrate this nicely. You’ll remark at how quickly these markets can bounce back after a fall. The historic price information will never offer more than a ‘suggestion’ of future performance, but it can help inform you about how share prices tend to behave.
Fear of loss needs to be kept in check as it can (in an ironic way) lead investors to create losses for themselves by panic selling after a crash, rather than sitting patiently and waiting for a recovery.
Fear of the difficulty curve
The difficulty curve of investing directly in shares and bonds is very real.
However, simple investment products and platforms have appeared which allow investors to completely sidestep all of the jargon and financial terminology which can be a barrier.
What knowledge is actually needed to invest in individual shares with confidence?
- What are shares
- How the financial markets work
- How to research companies and analyse their financial statements
- How to manage a portfolio and choose asset classes
- Investing psychology
That’s quite the curriculum!
But if you choose to invest via a robo-adviser or semi-managed investment service, what do you need to know as a minimum?
Each of these can be learned through the links above or possibly through training provided through the platforms on the investment platform itself.
Examples of investment platforms which reduce the difficulty of investing are:
Fear of regretting the wrong judgement call
This is a very human trait that all investors – novices to day traders – share. We will always feel some regret if we:
- Buy at the top of the market
- Sell at the bottom of the market
- Pick a company that subsequently tanks
- Investing in an Initial Public Offering which falls on its debut to the stock market
The key here is setting expectations low. If you begin your investment journey with an expectation that you will ‘win’ most of the time then you’ll be disappointed sooner or later.
The market is formed of people like you, plus fund managers, private wealth managers, hedge funds, day traders, portfolio managers of insurance groups, university endowment funds and sovereign wealth funds.
Rather than compete head-on with this professionally trained crowd of investors, it’s better to avoid the competition by drip-feeding money into the market on a regular basis. Sometimes you’ll invest high, sometime low. You won’t sell, except to rebalance your portfolio.
If you follow this approach:
- You’ll invest with a clear plan (so don’t need to make constant judgement calls)
- You’ll experience quite an average return (so there’s little to regret)
Conclusion: overcoming investing fears
Conquer (or avoid needing to face) these 3 investing fears and you’ll have the makings of a happy investor.