If you are scared of investing or lost when it comes to putting money at risk, this post is for you. Overcoming your fear of investing is important for starting. Saving aggressively is great. It is a foundation of financial independence. However, investing your savings in risk assets to build passive income is what investing is all about!
If You Are Scared Of Investing
In a post entitled, “How Often Should I Rebalance My 401k?” I share with readers my year to date performance, investments, 401k balance, rebalancing thought process and the minimum number of times I recommend everybody rebalance a year (twice).
Instead of dissenters talking about the thought process behind how often to rebalance and ways to maximize wealth, they focused on the definition of rebalancing! Granted I take a liberal view on the term rebalancing, but there is no rule on how an individual’s portfolio asset allocation should be and how they should rebalance.
You can have three stock funds and one bond fund each with a 25% weighting that gets adjusted once a year. Or you can have 10 funds where you meticulously rebalance every quarter because you’re a scaredy cat.
My asset allocation tends to be 80% stocks / 20% bonds or 20% stocks / 80% bonds. In other words, I take more aggressive bets when I believe in something, and want to have 20% dry powder to continue pressing when I’ve entered too soon. I can never pick the bottom, but I have conviction in what I do.
People Don’t Invest Because They Are Scared
And why are people scared of investing? Let’s go through some of the main reasons.
1) Lack of knowledge.
It’s natural to be scared of things you don’t know about People focus on what they understand, and ignore what they don’t. Instead of discussing the 10-year bond yield and comparing expected returns to one’s own YTD returns to come to a rebalancing decision, commenters focus on the definition of the word “rebalancing.”
It’s much easier to try and discredit my view of what rebalancing is rather than talk finance, even though there is no rule on what asset allocation and rebalancing should be!
My 401K rebalancing post was written to give readers a mental framework on what to think about before rebalancing. The goal is to remind everyone that not everything goes up in a straight line. Just 4-5 months ago, all everybody talked about was how Europe would bring us all down.
2) Fear of losing money.
When you fear something, you attack something. Why do you think some people who were deemed witches burned at the stake? It’s human nature to attack opinions of others if you fear you are being left behind.
If your performance is not keeping up with the S&P500, you are underperforming. And if you’ve got lots of cash sitting in a money market account yielding 0.2%, you are definitely falling behind. It takes guts to invest and put yourself out there. It’s scary, but if you never take risks, you will never make any returns.
The reality is, everybody fears losing lots of money investing in the stock market. The March 2020 downturn really scared a lot of investors to reconsider their asset allocation in stocks.
3) Fear of falling behind.
People attack people who take risks because they fear getting left behind. Investing FOMO can really do a number on your psychology. With investing FOMO, you tend to take excess risk. As a result, you may end up losing a lot more money than you are comfortable losing. Then, you fear taking any risk at all.
If you fear falling behind your peers because you’re afraid of losing money, you don’t end up investing as much as you should.
What To Do If You Are Scared Or Intimidated To Invest
Investing can be daunting. I spent 13 years in finance, got a graduate degree in finance and real estate, write a personal finance blog, was Series 7/63 registered, and have been investing since 1996. Eve after all this experience, I still lose money or underperform on occasion. Yet, I will continue to try my best and learn from my mistakes.
After I published my 401K rebalancing post I got an e-mail response from a subscriber saying, “This is so over my head, but I feel like we should sit down and try to do this together. So, when?“
Well, well. Your place or mine? I thought to myself. I was pretty impressed by her courage to ask me out at 10pm PST. But, in all good form I responded back if she would like to do a financial consulting session, I’ve got some time end of the week.
While I was responding to her, she e-mailed again, “Oh, sorry. I meant to forward this to my husband. So sorry, Sam!“
I couldn’t help but chuckle and smile. This is what I’m talking about! Sitting down with your loved one and having an open conversation about investing and your finances! You can’t just ignore things because hope is not an investment strategy!
If you are scared of investing, do the following:
Sit down with your loved ones and have a conversation.
Whether your loved one is your spouse, brother, sister, cousin, friend, choose someone who cares for your well being and have a talk. Step 1 from my 401K Rebalancing Though Process section is: Ask yourself if you are bullish or bearish about the future. Then explain to someone why you think the way you do.
If you can explain to someone your stance in a coherent manner, you might be onto something. When you talk things out with someone you feel safe with, good things happen. You will surprise yourself with how much you know!
Enrich yourself with knowledge.
Start reading the Wall St. Journal, Financial Times, and the Money section of the USA Today to get acquainted with terms. Watch a little bit of CNBC propaganda and frequently visit your favorite finance blogs.
You need to know what is going on in the world from a political and macroeconomic stand point in order to come up with an investment thesis. As I wrote in I’ve Seen The Future And It Looks So Bright, part of creating wealth is anticipating the future and betting on the future, whether you agree with the future or not!
Invest in target date funds.
These funds are professionally managed and take into consideration your target date of retirement to come up with their idea of a right balance of stocks, bonds, and other investments. Of course, you should read the prospectus and understand if their approach makes sense to you before investing.
Essentially, target date funds are a dummies guide to investing, which is fine! The lowest cost way to invest is through Exchange Traded Funds. There is an ETF for practically everything. But, the types of ETFs you invest in are entirely up to you. The same goes with index funds. However, you’ve got to make your own asset allocation decisions as well.
Just make sure that if you invest in a target date fund, to choose an INDEX target date fund. The fees on an actively-run target date fund are much higher and a waste. Most active fund managers cannot outperform their respective indices over the long run.
Consider entrusting your finances with a professional or robo-advisor.
There are some people who spend their lives understanding finance and investing in ways which will help you make money. You’re not going to change the motor in your car yourself are you?
If your expertise is not in finance, then its worth entrusting your finances with an expert. You’ve got CFPs, CPAs, bloggers who’ve worked in finance, and elders who’ve gone through the ups and downs to give you advice.
Be open to receiving professional advice or advice from more experienced individuals, but never stop thinking for yourself. I’ve launched my career and financial consulting business if you are interested in getting help directly from me.
Open up a CD or online money market account and give yourself some time until you know more.
Savings/money market accounts are only yielding about 0.1% on average. Online, you literally earn 99X more on your money as you build up your confidence to invest in riskier assets.
Estimate your risk tolerance.
Use Financial SEER to quantify and estimate your risk tolerance. Once you know what your risk tolerance is, you can invest more appropriately.
More Money Out There Than You Think
Everything is rational. We do things that enrich and make us happy and we stop doing things that impoverish and make us sad. Everybody I know in the offline world maxes out their 401K and is pretty much in the 401K by age guidelines I have. Then again, everybody I know understands the importance of saving for the future.
If you are scared of investing, don’t be! Come with an open mind and be ready to ask questions and share your ideas on Financial Samurai.
I encourage every one of you who is doing well to continue challenging my ideas and theories because that is how we all learn. And for those of you who would rather attack, I’m all for it. But please, at least tell us a little about yourself, your experience, your assets, and your performance so we have a better idea!
Recommendations To Build Wealth
The best way to become financially independent and protect yourself is to get a handle on your finances by signing up with Personal Capital. They are a free online platform which aggregates all your financial accounts in one place so you can see where you can optimize.
Before Personal Capital, I had to log into eight different systems to track 25+ difference accounts (brokerage, multiple banks, 401K, etc) to manage my finances. Now, I can just log into Personal Capital to see how my stock accounts are doing and how my net worth is progressing. I can also see how much I’m spending every month.
The best tool is their Portfolio Fee Analyzer which runs your investment portfolio through its software to see what you are paying. I found out I was paying $1,700 a year in portfolio fees I had no idea I was paying!
They also recently launched the best Retirement Planning Calculator around, using your real data to run thousands of algorithms to see what your probability is for retirement success. Once you register, simply click the Advisor Tolls and Investing tab on the top right and then click Retirement Planner.
There’s no better free tool online to help you track your net worth, minimize investment expenses, and manage your wealth. Why gamble with your future?