How to Conquer Your Fear of Investing

Are you afraid to start investing? Think you’ll lose more money than you’ll gain? Afraid that investing is too complicated?

There’s no need to be afraid of investing. Investing is quite easy and it’s the first step towards financial freedom!

Let’s examine the reasons you’re afraid of investing, and how to overcome your fear of investing.

Fear of Losing Money – Loss Aversion

You may have heard stories of people losing their shirt (aka a lot of money) in the stock market. Maybe these stories stick out more to you than the stories of people making fortunes from the stock market.

Everybody is afraid of losing money. I’m no different. The thought of losing money is painful. 

For most people, the pain of losing $100 seems to outweigh the joy of gaining $100. This phenomenon is called Loss Aversion.

Yes, the stock market has wild swings and has dropped significantly during recessions.

But the stock market has recovered from EACH and EVERY single recession. 

Stock market volatility is nothing to fear. During a recession, you won’t be technically be losing money because you won’t be selling your stocks. Money is lost on when you sell your stocks during a downturn to “realize” the losses.

There’s no need to fear recessions. In fact, when utilizing a dollar cost averaging strategy you’ll be buying a greater amount of stocks during a recession since the prices are lower. Trust me, you’ll thank me later. 

Fear that Stock Market Is Like Gambling

There seems to be a common belief that the stock market is akin to gambling. I can wholeheartedly tell you that this is completely untrue.

Let’s examine the game of blackjack.

The house edge in blackjack is around 0.5% if you use basic strategy. Source: Gambling Sites

That means you will be expected to lose 0.5% each hand you play. Of course there will be volatility in which you’ll experience large gains and large losses, but this is a long-term average.

Betting $100, after one hand you’ll be left with approximately $99.5.

• After 2 hands: $99
• After 3 hands: $98.50
• After 10 hands: $95.10
• After 40 hands: $81.83

As you can see, your money is expected to continue to decrease the more hands you play. It is a losing proposition. Gambling as a NEGATIVE expected return. What they say is true… the house always wins!

The casinos know what they’re doing. They want to entice you to play longer by providing you with free drinks. This not only lowers your inhibitions, but it gets you to stay and play more hands. Remember, you are expected to lose 0.5% on EACH hand! The more hands you play, the more you’ll likely lose.

On the contrary, stocks have a POSITIVE expected return. The stock market has returned 10-11% per year since 1926.

That means that an investment of $100 will increase on average to about $110 in a year.

• After 2 years: $121
• After 3 years: $133.1
• After 10 years: $259.37
• After 40 years: $4525.92

Imagine turning $100 into $4525.92! It is entirely plausible (and expected) when you invest in the stock market. 

Now imagine investing $500 PER MONTH for 40 years, from 1980 to 2020 with dividends reinvested. Here are the actual results based on DQYDJ’s calculator

Investing $500 a month, at the end of 40 years, you would have over $2.85 Million!

With gambling, you are expected to lose money over time. The house always wins.

With stock market investing, you are expected to gain money over time. YOU always win!

So now you see how the stock market IS NOT gambling.

Fear that Investing is Complicated

There seems to be so many options when it comes to investing. 401K, Roth 401K, IRA, Roth IRA. What’s the difference? Why does it have to be so complicated?

I’ve got some good news for you. After you learn the basics, it really is not complicated. You can learn the difference between those retirement accounts in my article here. I broke down the differences in simple language, and it should take you maybe 10-20 minutes to read and digest the material.

You can also invest in post-tax brokerage accounts like Schwab or Vanguard. These brokerages allow you to invest your post-tax savings into accounts where you can withdraw your contributions and earnings before your retirement age without paying a penalty.

It is extremely simple to set up a Schwab account. Just visit the website and fill out some quick and easy info about yourself.

Once you have your account set up, you’ll want to invest in the stock market. But what is “the stock market”?

The stock market generally refers to a compilation of large U.S. Companies. The most common index that closely tracks the U.S. economy is the S&P 500, which is an index that tracks the performance of 500 large U.S. companies including big names like Apple, Google, Hilton, and Wells Fargo. It tracks companies through a variety of sectors like Utilities, Real Estate, Financials, Information Technology, Healthcare, etc.

So how do you invest in “the stock market”? The way I recommend is to purchase low-cost index funds. An S&P 500 index fund closely tracks the performance of the S&P 500, without charging exorbitant fees. 

For Schwab, a popular S&P 500 index fund would be ticker symbol SWPPX. It closely tracks the index while only charging a small expense ratio of 0.02%. The industry average expense ratio is nearly 0.23%, almost 10X more! 

Over the past 15 years, SWPPX has returned 9.19% annually on average. Over the past 10 years, it has returned 13.67% annually on average. I know it sounds too good to be true that stocks return about 10% a year, but you can see from the SWPPX performance chart that it is true.

If you prefer Vanguard, Vanguard has a similar index fund in the form of an ETF, with a ticker symbol VOO, and an expense ratio of 0.03%.

Fear that Investing Requires a Lot of Money

The minimum investment for SWPPX is $1, so you can start investing even with small amounts of money. I’m not sure if VOO has a minimum, as I can’t find it listed on the site.

You don’t need a lot of money to get started. Whether it be $500, $100, or even a few dollars, you can get start investing now.

The earlier the start the better. The longer you give your money to grow, the more compound interest you will earn.

From this chart, you can see the theoretically impact of investing early.

In the example, Jack invested just $24,000 more than Jill, but because he started ten years earlier, his portfolio outperformed Jill by almost $300,000! The longer you let your money sit in the market, the more money it will make you. That is the beauty of compound interest.

You may think that you can wait just a little longer. A little longer becomes a few weeks, a few months, and eventually a few years. All the while, your money could have been amassing significant gains in the stock market, close to 10% a year. That means that your $1000 would have become $1100 a year later, and over $1210 another year later! Forty years later, that $1000 would become over $400,000!!

Fear that stocks are Overvalued

Do not fear all of the doomsday calls by so called “experts”.

Here are a few headline gems from recent articles:

• The Stock Market Has Not Been This Overvalued In 40 Years
• U.S. Stock Market Hits Record 77% Overvalued
• Are Stocks Overvalued? This Market Indicator Says So.

So how reliable are these “expert” predictions who use market “indicators”?

Here are some headlines from the past which turned out to be were completely  untrue.

1. How to get ready for the economic recession coming in 2017

Actual result: Article was published December 2016. There was no recession in 2017.

2. JP Morgan says there’s a 92% chance of recession within 3 years

• Actual result: Article was published December 2016. There was no recession within 3 years.

3. There’s more than 60% chance of a global recession within the next 18 months, economist says

• Actual result: Article was written April 2017. There was no recession within 18 months.

People love to make predictions. But people are bad at predicting the future accurately. If they are right, they will seem like a sage from the future. If they are wrong, they will suffer little if any consequences, and their prediction will have been all but forgotten. You can learn more about the folly of prediction in this Freakonomics podcast.

What’s worse are those predictions involving percentages. Let’s analyze the JP Morgan prediction that called for a 92% chance of recession. When a recession doesn’t happen, the predictor can clear their name by saying there was an 8% chance of no recession, and that’s what happened, so technically they aren’t wrong. 

Really? Thanks for nothing…

Don’t worry about the experts who claim that stock market is overvalued. 

All-time stock market highs happen more often than you think. The stock market hitting an all-time high doesn’t mean that it’s bound for a precipitous drop. Just check out a few of the stock market highs in recent years.

Your intutition might tell you that the stock market must drop after it hits an all-time high. But here’s what happens after the market hits new highs:

After hitting an all-time high, on average, the market returns 10% after one year, 31% after three years, and 54% after five years!

Putting it All Together

The best way to grow your nest egg is to start investing right away. To conquer your fear of investing, there are several things you need to understand about the stock market:

1. You don’t need to fear losing money because the market has recovered from each and every single recession. You won’t lose money so long as you don’t sell your stocks during a market downturn.
2. You don’t need to fear that you’ll lose your money like you would at the blackjack table because the stock market is not gambling. The expected returns from gambling are negative, whereas the expected return from your investments is positive.
3. You don’t need to fear that investing is complicated because the best strategy for most investors is to buy and hold simple low-cost index funds.
4. You don’t need to fear that investing requires a lot of money because you can start investing with as little as $1!
5. You don’t need to fear that stocks are overvalued because most market predictions are wrong. Even if they’re right, the market on average continues to do well after hitting an all-time high. 

Take some time to absorb and understand these concepts to conquer your fear of investing. Then you can take action and start your investing journey towards financial freedom.

Let me know your thoughts!

Are you afraid of investing? What do you think you need to conquer your fear?