How to Get Over These 5 Scary Things About Investing

By Julie Rains on 27 October 2014 1 comment

I was never scared to invest.

The moment I had discretionary income, I started investing. I paid no attention to market moves until Black Monday, October 19, 1987. At the time, my husband owned stock in his employer and we lost hundreds of dollars in one day. And after that? We kept investing. Though spooked by this major downturn, we persisted and today remain happily invested. (See also: 6 Basics You Must Know Before You Start Investing)

Don't let fear prevent financial success, and take a minute to think about whether you harbor and of these five common (but ultimately counterproductive) fears about investing.

1. You Can Lose Money Quickly

Even if you invest in market-index funds that track the market, you can lose money quickly if the entire market falls in value. Unlike the interest credited to your savings account, gains in the stock market are not linear with steady growth over time. Instead, your investments may decline before growing.

No one can consistently predict when the stock market as a whole or individual shares of a company's stock will rise or fall. So, whether you are a beginning investor or a seasoned one, you will experience drops in the value of your investments, often dramatic ones in a short period of time.

Fight the fear: Invest to build wealth over the long term, not to make fast money in the short term. Never invest cash that you need to pay expenses.

2. You Have a Large Position in Your Company's Stock and the Share Price Plunges

One of the scariest investment scenarios is the sudden drop of your employer's stock when shares comprise the majority of your wealth.

For example, retirees of Lucent Technologies went from millionaire status to nearly penniless when shares fell to $0.55 in 2002 from a high of $84 in the late 1990s. Similarly, employees who held Enron in their 401(k) plans and ESOPs (employee stock ownership plans) experienced major losses when the company declared bankruptcy.

Fight the fear: Realize that company stock is not inherently bad, just inherently risky as a major component of your wealth. After all, Microsoft and Google employees became wealthy after receiving company stock through stock options and profit-sharing programs. Just remember to diversify your holdings by investing 401(k) dollars in market-index or similar funds and making outside investments in other stocks.

3. You Will Invest in Something You Don't Understand

You may have heard that you should never invest in anything you don't understand. Even billionaire Warren Buffett refused to invest in tech stocks because he didn't grasp how technology companies made money.

But understanding often follows action. So, if you are a beginning investor, you may purchase shares of a mutual fund that tracks the S&P 500 without fully comprehending what you are buying. Later, you may notice that the fund value increases on the days that this index rises and decreases on the days that it falls. Eventually, you grasp the correlation; now you are (finally) putting money in investments you understand.

Fight the fear: Educate yourself about investing before making a move. Then, start by investing small amounts with a trusted brokerage firm until you feel comfortable with the process; pay attention to your investments to gain understanding. Stay away from investments that are portrayed as high return, low risk, complex, and/or available to an exclusive list of people as these are likely to be speculative investments at best or fraudulent schemes at worst.

4. You Will Make Mistakes

No one likes to make mistakes, particularly ones that involve losing money. But if you are an investor, you will misjudge market direction, buy overpriced shares, sell investments when they still have potential to grow, etc. You just will.

Fight the fear: Don't berate yourself if an investment doesn't behave as expected. Note your rationale for making a decision, track your results, pinpoint the sources of mistakes, learn from the experience, and move on. Also, realize that your goal is to build wealth, not perfectly time each transaction. Selling shares at a gain (even if the stock price continues to climb), for example, may be the right action to take, given your financial situation.

5. You Will Brag About an Investment, Which Then Slips

After you master investing basics, you will likely begin to feel more confident as an investor. So, you might start evaluating and then investing in individual stocks or actively-managed funds in addition to market-index funds.

On a good day, week, or month, you may make hundreds or thousands of dollars and boast about your achievements to friends. Soon, though, the price of your picks may fall and you feel foolish for bragging. Being discovered as an average investor or a flawed one is scary.

Fight the fear: Realize that you will make mistakes and great stocks will slip, even when you buy shares at an excellent price. Discuss the economy, investment styles, and the performance of publicly-held companies with friends or coworkers. But avoid broadcasting specific investment moves.

Do you still think investing is scary? Well, you could be safe and put money in a traditional savings account or certificate of deposit. Sadly, though, annual interest of 1% or less means that the buying power of your money is unlikely to keep pace with inflation.

But if you take risks, you have the opportunity to participate in the growth of the economy, which has historically yielded greater returns than safer investments. Sure, investing mistakes can be haunting. But staying on the investment sidelines and having little wealth when you retire is even scarier.

How did you overcome your fear of investing? And if you are still afraid, what are you afraid of?

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Guest's picture
Becky Law

Great post! It's scary if you venture into investing without the necessary research and analysis. With binary options trading you can get upside exposure while only taking on limited risk.