We have all been there before. On this particular day, all of the media and especially the financial TV stations are blasting headlines and alerts that the DOW and S&P 500 are down a record amount, and billions of dollars in value has been wiped from investors’ portfolios.
Perhaps, specials will air on CNBC outlining the dire state of the markets driven by election headlines, the possibility of war, or something that could trigger the next financial crisis.
We All Hate Losing Money
Every investor dreads the thought of losing hundreds or thousands of dollars in a matter of minutes.
Even if you do not follow the market very closely but contribute a monthly percentage to your 401(k) or maybe you are still a novice in the investing game, chances are the tools and tactics the media uses to garner viewership through fear will work to scare you into tuning into their stations.
Even worse, the tactics aimed at gaining eye balls to their networks could cause you to make short-term investing decisions out of fear rather than a careful, strategic plan.
While no investor enjoys losing money on a big down day, the most successful investors are agnostic to the daily price movements and sometimes employ a strategy counter to the market. In the words of one of the greatest investors of all time Warren Buffett, the key is to “be fearful when others are greedy, and greedy when others are fearful.”
The question is how do we overcome our fear of losing money in the stock market?
There are three primary tactics that this article will discuss to overcome your fear of investing in the market.
1. Gain an understanding of the stock market, investing, and your personal investment strategy
All too many times, the primary cause of fear in anything in life is driven by our lack of knowledge or understanding.
Whether it’s a child’s illogical fear of monsters under the bed or the endless number of phobias in today’s society, addressing our concerns through study and a better understanding, personal life experiences, and rationalization of our current situation will allow us to make the decisions necessary to have a better quality of life.
Your Life Experiences Influence Your Initial Investing Mentality
Our own experiences, the lessons taught to us by parents or guardians, and the way we perceive the world around us is key to shaping our personal fears in life.
Similarly, if you are an investor who experienced the stock market perils of the financial crisis in 2008 and 2009, or you have gone through stints of unemployment, chances are you are much more risk-averse out of the fear from the instability you have endured.
In order to overcome these fears, the best method is to understand and address the root cause of your fear. After all, fear more than likely stems from a lack of understanding of where your money is going when you hit “buy” on that fund in your portfolio.
For those who do not have a good understanding of financial markets, investing in the stock market is a lot like gambling.
Therefore, to overcome your fear, you should learn the basics of investing.
Stocks Represent Ownership In a Business
While gambling is built on a pyramid of odds tilted in the house’s favor, the first thing you should understand is that stock and funds of stocks are representations of your ownership in an actual business.
The businesses whose stock you own stock operate through a business plan in a particular market, generate revenues, incur certain expenses, and hopefully profit from their activities.
As a fractional owner in the business, you are entitled to receive your share of the profits through cash dividend payments in your account or through the companies’ reinvestment of the profits for expansion and growth. As the company grows, so does the equity value of your share of stock.
As the amount of profits and the value of the business will increase and decrease based on how much of a particular good or service a business sells, a company exposed to a particular segment of the market may experience rapid growth or accelerated declines while a diversified portfolio of businesses will generally rise and fall with the overall growth in the economy as both winning and losing companies comprise the portfolio.
Learn Basic Themes of Economics
While understanding how interest rates, political policy changes, and GDP growth rates can be helpful for making certain stock picks, these factors that drive the economy should essentially be ignored in your investment decision-making process over the long-term.
After all, predicting tax rates and political agendas in 20 years and basing your current investing strategy on these predictions is more like gambling than following a proven strategy.
Instead of trying to predict the unknown, the key to trampling your investing fears is to have a high-level understanding of the stock market and where your investment dollars are going.
As previously discussed, your investment in the market through stock or funds entitles you to an ownership stake in particular companies. If you purchase an S&P 500 index fund, you are obtaining ownership in the 500 largest companies in the U.S. – ranging from General Electric and General Motors to Apple and Amazon.
Each dollar you invest is allocated to stock in each of the companies in the fund based on their relative size with larger companies making up a larger relative amount of your investment.
The good news is on any given day, the stock of Amazon may be down. However, this could be offset by your ownership stake in Procter & Gamble or Wal-Mart which offers relative stability and quarterly dividend payments to the fund because of their relative maturity as companies.
Because of this diversification, you run less of a risk of losing your entire principle and investment and can still enjoy the equity gains and dividends these funds produce. In fact, over the last 90 years, the S&P 500’s total annual return has average around 10% – much better return tilted in your favor.
Continue Learning Each Day
Now that you understand where your dollars are going, you should be one step closer to overcoming your fear of investing in the stock market.
You can continue to develop your knowledge through reading books, practicing your investment decisions through a mock portfolio, and reading about the funds and largest companies that make up these funds.
As you gain further knowledge, you will understand the overall business strategy that companies employ, and you will better understand that just because the equity value of a company may swing wildly from day to day, these market gyrations have little to do with the fundamental business plan of a given company.
Instead, you may see a market sell-off as an investment opportunity to buy a great company or basket of stocks “on sale.”
Set and Stick to an Investing Game Plan
If you have a basic understanding of the stock market, the next area to consider in order to overcome your fear of investing is to set a personal investment plan and determine a path to achieving these goals.
Whether you are 20 or 60, understanding your personal investment needs and setting a strategy of the types of funds or stocks will help you live your best life of financial freedom – or at least supplement your income along the way. Having confidence in your strategy will allow you to sit back and relax knowing that even though the market may be well-protected, you are playing the “long game” and sticking to the portfolio you devised.
Investing for Younger Adults: Focus on Growth
For someone in their 20s and 30s, their investing time horizon is much longer than someone who is 70 and currently in retirement with little or no earned income from working.
Because of a young investor’s time horizon of 30+ years and ability to continue earning a salary, ample time exists to ride out any market volatility and allow your funds or stocks recover.
Therefore, younger investors should consider a portfolio in more growth-oriented companies that are leading the way in their respective fields and replacing some of the former mainstay, blue chip corporations of yesterday.
Because mid-capitalization and growth-oriented funds are typically comprised of smaller, less mature companies or businesses that are growing revenue quickly but may be incurring operating losses as they gain market share in their industry, the funds may be more volatile with higher highs and lower lows compared to the market, or S&P 500.
However, while the relative risk may be more than the market in general, higher annualized returns reward shareholders for their patience and willingness to take on a little more risk.
For instance, I personally have multiple growth-oriented funds with their respective returns shown below as of April 2019:
| Fund Name | Ticker Symbol | Average Annualized 10-Year Fund Performance | Average Annualized 10-Year S&P 500 Performance | Difference |
| Fidelity Growth Company Fund | FDGRX | 20% | 16% | +4% |
| Fidelity Blue Chip Growth | FBGKX | 19% | 16% | +3% |
| Fidelity Nasdaq Composite Index | FNCMX & ONEQ | 19% | 16% | +3% |
| First Trust Nasdaq 100 – Technology Index Fund | QTEC | 21% | 16% | +5% |
While 3%-5% may not seem like drastic market-beating returns or worth pursuing, over a 10+ year period, when compounded annually the results can be quite lucrative.
Example:
For instance, let’s say I took the easy route and just put $10,000 of my 401(k) money in an S&P 500 index fund 10 years ago.
At the end of the period, I would have had a balance of around $44,000 based on the historical market performance of 16%. If instead, I had invested in QTEC with returns averaging 21%, my portfolio would be around $23,000 higher at a final balance of $67,000. On a larger scale with additional contributions and over the course of the ensuing decades, the difference in investing in a fund that outperforms the market by 3%-5% is definitely worth pursuing.
Investing for Older Adults: Slow and Steady with a Focus on Income
While being virtually 100% invested in growth-oriented funds may be suitable for younger individuals with longer time horizons, older individuals may not have the time horizon to see a recovery in these funds before they begin needing distributions in retirement.
For older investors, implementing a strategy that allows for a more income-focused portfolio will offer more stability to their portfolio. While this strategy will not allow for the accumulation and maximization of total net worth over a longer period of time, the dips that the market periodically experiences will be less severe in a portfolio diversified with larger, blue chip and dividend-oriented funds.
Focus on Wealth Preservation
Hopefully, by the time you are in retirement, your investing mode will shift from wealth accumulation to well preservation. Instead of trying to grow your monthly balance, the goal should be to live off the income and gains the portfolio produces without touching the principle balance that is spinning off dividends and capital gains.
By shifting to a less aggressive strategy as they near retirement, middle-aged individuals and retirees will have much more comfort knowing the range that their portfolio experiences will be narrower and less volatile. While they will probably not achieve market-beating returns over multiple years or decades, should the market experience a downturn, their portfolio should not suffer as much either.
For those individuals in retirement who are no longer earning an income, setting a strategy that includes a mixture of cash in money market funds for the next several months of expenses along with stable, shorter-term investments that may include bonds as well as growth-oriented funds could help offer stability to the portfolio while also ensuring that the portfolio will last for the duration of retirement. Additionally, having enough liquid cash will allow for additional longer-term investments to be made at opportune times as the market may experience a pullback.
Setting and sticking to an investment strategy to your own personal comfort level is another great way to overcome your fear of investing. Coupled with continually learning about the stock market and investing, devising an actionable plan and sticking to it will help take out some of the emotional aspects of investing that could cause anxiety for both new and older investors.
2. Automate Your Investments
After you have researched and learned about the stock market and determined your investments goals and have picked the type of funds that are right for your personal strategy, the next step to overcome any fear is to automate your investments.
By automating your investment contributions, you have taken away one of the greatest pitfalls that cause people to sit out massive bull market runs – attempting to time the market.
Since losing money is categorically the greatest fear that investors face, virtually every novice investor that has a healthy fear of their own limitations will be worried that the market is due for a correction.
Have you ever noticed that the doomsayers and pessimists tend to be the most vocal and opinionated?
Automating Your Investments Keeps You From Staying on the Sidelines
Because we all fear the next Great Depression or another Great Recession, many retail investors are readily influenced when some hedge fund or Wall Street titan comes on TV and says that they believe the market is due for a correction or downturn.
By pontificating about the coming market doom, these individuals are essentially selling themselves as the only place to trust your money through the “upcoming market downturn” – which is obviously a brilliant marketing strategy. However, rarely are these individuals right for more than a period of weeks or months as the long-term trajectory of the market continues to be upwards.
Even if hearing about potential downturns does not cause you to keep your money out of the market, chances are you could still fall prey to trying to time the market if your investments are not automated. Since none of us has the ability to predict the future, attempting to time your investment contributions for market lows could cause you to miss out on some huge market gains as you think a correction or downturn is just around the corner.
In addition, when the market pulls back 10% or 20%, who is to say you will have the courage to pull the trigger on your buy order?
Dollar-Cost-Averaging Keeps You Buying During Peaks and Valleys
By dollar-cost-averaging, you will have the benefits of buying both when the market is down and when the market is up.
Since the market tends to steadily rise upwards at a rate of 10% per year over the long-term, your cost basis will continually rise. However, at least you will be contributing rather than holding out for the occasional market downturn.
Another benefit of automating your investments is the fact that this money will be prioritized and treated like it is already spent before the month begins.
For instance, if you elect to contribute 15% of your gross monthly salary to your employer-sponsored retirement plan, you will not receive that money and have to make the conscious decision to invest rather than buying that new set of golf clubs or other item you have been wanting this month.
By setting a financial plan in motion and automating the process to achieve your goals, you eliminate any points in the chain to get cold feet or not follow through with your strategy. Even when the market is down, you can know that your contributions are going in at a lower dollar amount at opportune times which will help you overcome an anxiety you may have about investing.
3. Find an Investing Mentor
Finding another more knowledgeable or experienced investing mentor to help guide and hold you accountable to your strategy is another great way to overcome your fear of investing.
By having someone with a proven track record of success and wealth accumulation in the market, you will be able to include their thoughts and strategies in your own investment decision-making process. If you ever begin questioning your strategy or worry about the state of the market, you can look to a more seasoned investor for affirmation on your strategy and guidance during volatile markets.
If you are used to making investment decisions on your own for long enough, chances are there are points where you question if your strategy is relevant in today’s market or your current financial situation. However, by having another more knowledgeable investor in your corner for feedback and alternative ideas will help you accomplish your own financial goals.
Even if you are the only person in your family who invests or you do not know anyone you trust for investment advice, there are plenty of other ways to find mentors.
You could join online communities such as the Motley Fool, listen to financial or investing podcasts, find a local investment or economics club, or even hire a financial advisor for guidance and coaching when you need help developing or sticking to your own game plan.
Having another person or group of people with differing viewpoints, backgrounds, and investing experiences is a great way to learn and test your current plan. When the market inevitably drops, a market-savvy mentor or group will help you stay calm, stick to your strategy, and maybe even take advantage of a temporary downturn.
Conclusion:
While eliminating all of the fears and worries from investing is virtually impossible, by continually learning, developing and automating your own investment strategy, and finding a mentor, investment community, or financial advisor, you will soon be able to control or alleviate your fear of investing.