Four Steps to Conquer Your Fear of Investing

If you’re nervous about investing in the stock market, you’re not alone. It’s been a crazy year in the market—the first extended bear market since 2008, coupled with some strong bounces. Those bounces are typical of bear markets, but they leave many investors wondering whether the worst is over, often only to dash those hopes.

And now, of course, there’s talk of a recession. At best, it causes confusion. At worst, it causes fear.

If you find yourself battling either emotion, here are some suggestions. 

1. Develop a healthy fear of NOT investing

If it’s safety you’re after, there are few safer places to put your money than a bank. Because deposits are insured by the Federal Deposit Insurance Corporation, you could put up to $250,000 in a bank account and rest easy knowing that if the bank went out of business, the federal government would make sure you got your money back.

While an online bank account can be a good place to keep some savings for emergencies, right now many brick-and-mortar banks are paying just a fraction of one percent interest, making them a horrible place to pursue long-term goals like retirement.

For example, let’s say you’re 30 years old and deposit $10,000 at .01 percent interest. In 40 years, your $10,000 will have turned into — wait for it — $10,040. That’s right. After 40 years, you will have made just $40 on your 10 grand. And once you factor inflation into the mix, the buying power of your $10,000 will have taken a big step backward.

Let’s say you earn 7 percent instead. In 40 years, your $10,000 will have turned into $163,000. And 7 percent is a very conservative assumption since the stock market’s long-term average annual return has been 10 percent.

So, instead of being fearful about investing, it’s more logical to be fearful about not investing.

2. Learn a little market history

Many of the mistakes investors make are due to their emotions. If the market falls, some people get scared and pull money out of the market, usually to their detriment. A little knowledge of market history can help you stay the course.

The longer you keep money in the market, the more likely you are to make money. When Morningstar analyzed the stock market’s performance during each one-, five-, and fifteen-year period from 1926 to 2016, it found that 74 percent of the one-year periods showed positive returns, 86 percent of the five-year periods generated gains, and 100 percent of the fifteen-year periods ended in positive territory. In other words, based on 90 years of history, if you stay in the market for at least 15 years, it’s a virtual certainty that you will make money.

Putting time on your side is also the key to surviving a significant market downturn. According to Morningstar, someone with $100,000 invested in the stock market at the beginning of 2007 would have lost nearly half that amount by early 2009. Brutal, right? However, if they had stayed invested, by January 2017 their portfolio would have been worth nearly twice its value on January 2007. Despite that horrible downturn, their average annual return over those 10 years would have been nearly 7 percent.

3. Start small

If you have a chunk of money to invest but just can’t work up the courage to hit “buy,” consider investing a little at a time through dollar-cost averaging. The idea is very simple. Just take the total amount (let’s say $12,000), divide by the number of months you plan to invest (let’s use 12), and invest that amount at the same time every month ($1,000 per month).

If the market has a good month, your money will buy fewer shares. If the market has a bad month, your money will buy more. You never have to worry about getting the timing just right. By spreading your investments over a year a more, you can eliminate your worry about losing a lot of money through an immediate downturn.

4. Keep it simple

Investment terminology can be confusing. Diversification. Asset allocation. What does it all mean? You can put these helpful concepts to work without qualifying for a job on Wall Street by investing in a super simple target-date fund.

Because they are mutual funds, target-date funds are inherently diversified — that is, the money you invest is spread out among multiple stocks, bonds, or other investments. And they take care of asset allocation decisions for you. That means they are designed with an appropriate mix of stocks and bonds for someone your age. They even automatically adjust that mix as you get older, tilting their stock/bond allocation more toward bonds to make your portfolio appropriately more conservative as you near your intended retirement date. (Also read, Don’t Be Surprised if Target-Date Funds Miss the Mark.)

It’s understandable that the last bear market may have dampened your enthusiasm for the stock market. However, the market continues to offer most people their best opportunity for building wealth. The steps described above should help you navigate the investment waters without fear.

Take it to heart: “Plans fail for lack of counsel, but with many advisers they succeed.” – Proverbs 15:22

Take action: If you’ve never done so, run some numbers using an online calculator to find out how much you should be investing each month.

Read more: Read 3 Essential Questions About Investing.

, ,

Comments are closed.
Share This