Learn how to conquer your fear of investing in stocks Follow these simple steps and become a better investor. More often than not, the fear of the unknown is the reason for the fear of investing in stocks.
I know a lot of people who make a lot of money, but their stock portfolio (including mutual funds) is extremely tiny compared to their net worth. This is because most of them are afraid of investing of investing in equity. Many of them have lost money in the past, and do not feel confident of investing again.
The top three reasons people give for not investing in stocks are –
- Afraid to lose money
- Fear of the unknown – don’t know which stocks to buy
- Burnt in the past by following tips/advise from others
This article if for you, if you are one of the following –
- You don’t trust the stock market
- You know you should take more risk but don’t
- You don’t know much about the markets
- You are afraid you will get the wrong advise from the so called ‘experts’
- You have majority of your assets in cash and fixed deposits
- You want a higher rate of growth on your investments
- You have grown a sizable financial asset and absolutely hate losing money
Let me ask you some provocative questions.
- Weren’t you afraid when you were learning to ride a bicycle or learning to swim? Weren’t you afraid of falling down or drowning?
- Weren’t you afraid of the first day at your first job? What if it was not what you expected?
- Weren’t you afraid to get married? What if your spouse turned out to be horrible?
- Weren’t you afraid when you took some important tests in your life? What if you didn’t get a good score to get into the college of your dreams? Weren’t you afraid then?
Life is full of unknowns, but you make a decision – one way or another. Sometimes, we take decisions that change our entire course of life, even though we have very limited foresight.
So, why this fear of investing in the stock market? So what is so different about investing in stocks?
If you an in Indian investor, it’s safe to assume that you have some investment in gold. Do you know even after the spectacular rally until last year, in the long term, gold has returned just about the same as inflation – the consumer price index, which averages just under 10%.
If you are in the US, and you own a home, you have seen what can happen to the home prices. You may have also seen the dot com stock market crash. But since then, if you had left your investments untouched, it would have (in most cases) recovered all the losses and then some.
Just before the 2008 crash, I had bought some Starbucks at $20/share. Within a year, the stock crashed to below $10/share. I didn’t have the courage to buy some more (I should have). Today the stock has not only made up for the loss, but is trading at close to $80/share – a gain of 400% in 7 years.
I did several presentations on how to get rid of fear of investing in the stock market. I asked the participants the following questions –
- If they were married – most of them were
- How many had an arranged marriage – most were arranged marriages
- How many days/weeks/months had they known their spouses before the wedding – most had been introduced to their spouse in the last 12 months
- How many times had the met their spouse before the wedding – most had met their spouses less than 10 time
My question to them was, they took the biggest risk in life and married a person they really didn’t know that well, then why were they ultra-conscious when it came to risking (investing) money?
To keep things in perspective, losing small amount of money is not a big deal in the grand scheme of things. Take small risks until you get a better understanding.
Here are some ways to conquer your fear of the stock market.
- Fear of losing money
- Remember the majority of your net worth is in assets you are comfortable with. Invest a small amount that you can afford to lose and get your feet wet. Start with buying one share in 2-3 large companies.
- Invest in a large cap mutual fund. You will not lose more than 20-30% in the worst case scenario.
- Uncomfortable with the daily ups and downs of the stock market
- Well, that is some of the fund, but if that is not your cup of tea, investing in a large cap mutual fund will ensure that the daily movements are not to large.
- Ignore your investment, but then you will never learn to become a better investor.
- Don’t have time or knowledge to invest in stock market
- Invest in an index fund. Your return will be close to market average, still more than what you earn on your bank deposit.
- The cost of a typical index fund is less than 0.5% percent – an efficient way to invest in mutual funds.
- What if I need the money sooner than planned?
- So be it, you win some, and lose some.
- Investing in equity will give you that option – you can sell the stock that makes sense to meet your needs – something you cannot do with mutual funds. When you sell a unit of mutual fund, you sell it as a basket.
Gather the confidence and take the following next steps –
- Educate yourself. There are several good books and blogs like safalniveshak.com and www.jaagoinvestor.com in addition to www.investingfunda.com.
- Read a book on the basics of stock investing.
- Read about what you should do BEFORE you invest – https://investingfunda.com/5-things-to-do-before-building-a-stock-portfolio/.
- Open a DEMAT account with a brokerage like edelweiss.com or www.scottrade.com.
- Link your savings account to the demat account and transfer some money to the demat account.
- Start transferring a small amount to the demat account on a regular basis based on the frequency of your pay cycle.
- This is your ‘play and learn’ money. Be ready to lose some money as you learn the ropes.
- Start buying 1 share of companies you are interested in. Keep the investment to known or large companies.
- Set some ground rules – doesn’t matter how right or wrong they may be, and follow them. This will help you learn to be disciplined and take the emotions out of your decisions.
- For example, sell 50% of shares when the stock gains 15% or buy 1 more share if the stock price drops by 30%. Keep the investment amounts small.
A discussion on risk and loss of money is never complete without talking about inflation. Keep in mind, if the post-tax interest you get on your bank deposits is less than the real inflation rate, you are losing money. For example, it is safe to assume the real (actually experienced by you and me) in India is about 9-10%. In other words, the buying power of Rs. 100 today is about Rs. 90 in one year. Inflation in US is about 1.5%.
Hence by leaving money in the bank, you are already losing money!