Fear is the number one thing that prevents people from investing in the stock market. It’s crazy how much fear controls financial decisions.
We recently surveyed The College Investor readers about what stops them from investing (and fear was talked about a lot). Here are some of the things shared:
- I’m unsure about investing after the stock market crash a few years ago.
- I know I need to invest but I don’t want to lose money.
- I’m thinking about starting to invest almost daily now, but I can’t do it.
- I want to get a better return on my money, but I’m not sure about the risks.
- I was doing my taxes and realized I wasn’t really investing outside of my 401k. It made me think I might lose a million dollars or more when I retire.
Do you see the joint Fear of investing Trends?
- Losing money today
- Losing money in the future
- risk
- Don’t know where to start
These are all legitimate concerns! And it stems from good reasons. But the truth is simple: Not investing is probably the worst outcome ever (even if you don’t realize it), so you need to overcome your fear of investing in the stock market.
Why are you afraid to invest?
Fear stems from the original “fight or flight” mechanism we needed when we were hunters and gatherers. He helped us by overriding our senses to keep us away from danger. The feeling of fear goes beyond logic and other feelings, and takes over your body.
But how does this apply to investing? Because in today’s society, not having money is as dangerous as not having food or shelter in the days of Neanderthal man. Our mind knows that money = shelter = food = safety. So, losing money can cause a tremendous amount of fear.
The problem is that fear makes you ignore logic. You have to fight yourself to accept the truth – and that is very difficult. But there are ways to overcome this fear, and here are some steps to take.
Accept the truth
The first step in overcoming fear is accepting the reality of the situation. In our case, the truth is fear of investing. But what does that mean?
It is usually the fear of losing money, or the fear of the risks involved with your money. It may also be not knowing where to start – which increases anxiety that you might make mistakes with your money.
The truth is that investing in broad index funds (or the total stock market) is the best way to grow your money over the long term (i.e. over 30 years or more). Over the history of the stock market, the average return has been 8%, which is higher than any other investment or savings account.
The flip side is that if you don’t grow your money through investing, you could run the real risk of not having enough for retirement. Then, all your fears come true for a different reason – you just weren’t invested. If your money is growing only 1-2% per year, you will be short in retirement. All your fears will come true when you live on food stamps into your 80s. This is the truth.
Let me show you:
- Investment: If you invested $200 a month for 40 years, at an 8% return, your money would grow from $0 to $602,000.
- to provide: If you saved just $200 a month for 40 years, at a 1% return, your money would grow from $0 to just $22,000.
This is a big difference. This is honestly a life or death difference. You should be afraid not to invest.
Agreeing to change
Once you accept the truth, you have to agree with yourself (remember, that internal battle) to change. The change can be simple – maybe create an action plan to move towards that change.
With investing, change must overcome your fear of losing money. So, change may include steps:
- Educate yourself about investing (read how to start investing)
- Read a book (read our picks for the best books here)
- Open an account – This can be a 401k, Roth IRA, or regular brokerage account
- Deposit money into the account, but keep the cash
- Then invest a small portion when you’re ready
If you make the plan, you’re more likely to get it done later. And if you don’t know where to start, you can consider something like a robo-advisor or even a financial planner. Check out Vanguard’s personal advisor services for a low-cost option.
Secure new solid ground
Finally, you need to build on your foundations and prepare new solid ground. Use your business plan and start teaching. Once you get an education in investing, you will notice that your fear will decrease (simply because you have become more confident).
Then, once you have the education, you need to open an account. You don’t have to move quickly – move through your action plan when you feel comfortable, and build from there.
Doing this over and over again will slowly help you overcome your fear of investing and losing money. Education is key.
What other tips do you have for overcoming fear of investing in the stock market?
