Laura answers a listener's question about overcoming the fear of investing when the future seems uncertain.
Laura answers a listener's question about overcoming the fear of investing when the future seems uncertain.
Money Girl is hosted by Laura Adams. A transcript is available at Simplecast.
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Welcome back to Finance Friday, another special edition of Money Girl, where I answer your burning money questions! Today's topic comes from Julia, who says:
"I'm in my late 20s with a good job and keep hearing that I should be investing for retirement. But I'm worried that whatever investment I buy will lose value and I'll wish I had just kept my money in a savings account instead. How can I overcome that fear, especially when the U.S.'s economy and political climate seem so uncertain?"
Thanks for your question, Julia! I appreciate you asking it and want to welcome everyone listening to episode 905 of the Money Girl podcast! I'm Laura Adams, an award-winning author, money speaker, and on-camera spokesperson. You can record your money question or comment by calling our voicemail at 302-364-0308.
I've been hearing concerns similar to Julia's from many people, so if you're feeling uneasy about investing, you're not alone. Many fears can keep you from making essential money decisions and reaching your financial goals.
While being skeptical is healthy, this post will review five common investing fears you should overcome to feel confident about building wealth.
If you want to learn more about this vital topic, I'm offering an upcoming workshop called Overcome Your Fears & Procrastination and Start Building Wealth. Subscribers to my newsletter, The Money Stack, will automatically receive details about this live educational event and video replay. So, please visit LauraDAdams.com and sign up for The Money Stack!
How to overcome common investing fears
You've probably heard the quote from Franklin D. Roosevelt, the 32nd president of the U.S., from his inaugural address during the depths of the Great Depression when he said, "The only thing we have to fear is fear itself." That also applies to investing because being fearful of it can hurt you. Not investing can be riskier than investing!
Keeping your money entirely safe for an extended period can leave you with much less than expected due to inflation. If inflation is 3% and you’re only earning 1% in a bank account, your money has lost 2% of its purchasing power. And that loss compounds over decades.
But the fear of losing money is valid, so I'm not trying to convince Julia or anyone to ignore it. Many smart people are scared of investing. My goal is to discuss why you may be afraid, explain how to invest with low risk, and clarify the consequences of not investing. Once you know how to invest in a comfortable way and get excited about building wealth, it can motivate you to create a sound long-term investing plan.
Here are five common investing fears and tips to overcome them.
1. Fear of losing money.
Anyone who's lived through a market downturn, like the 2008 Great Recession, knows the market can decline quickly. But by 2012, the market was higher than before the downturn and trending up.
So, there's no guarantee your investments won't lose money in the short term. That's why investing money is only appropriate when you have a long horizon, such as at least three to five years. If you need to spend a pot of money sooner than that, it should be saved in an FDIC-insured bank account, not invested.
Julia, to overcome your fear of investments losing money, consider how the market has performed over the long term. The stock market has historically returned about 10% even with short-term dips.
If you hope to retire in 10, 20, 30, or more years, what happens to your investments daily, monthly, or even yearly is irrelevant. For long-term investors, your investment decisions should never be based on the news, hot stock tips, or any sensational spins on what's happening in the markets today.
Investing means taking calculated risks to grow your money over time. It's the opposite of gambling, day trading, or trying to pick winners like individual stocks.
Diversifying your investments is another way to overcome the fear of losing money. That means you don't buy one or two stocks or only invest in one sector, like technology. If those investments drop, they may never recover.
Instead, you can own hundreds or thousands of investments at once by buying shares of a well-diversified fund, such as an index fund. An index fund aims to mimic or outperform a given index, like the Standard and Poor's 500. It tracks the 500 leading publicly traded companies in the U.S., making it one of the best gauges of the overall stock market.
If some of an investment fund's underlying stocks go down, others may maintain their values or rise, significantly limiting potential risk. That diversification allows you to earn a return based on the performance of the broad market. So, as long as the entire market increases in value over the long term, so will your investment balance.
2. Fear of scams.
If you're afraid of losing money due to a scam, that's easy to avoid if you use the right investing accounts. For instance, if you contribute to a workplace retirement account, like a 401(k), you typically have an investing menu with a well-known brokerage firm, like Fidelity or Vanguard.
In addition, workplace plans are covered by The Employee Retirement Income Security Act (ERISA). That's a federal law that regulates how companies that offer retirement plans must manage them so workers are protected.
Choosing an individual retirement account (IRA), self-employed retirement plan, or regular brokerage account with coverage through the Securities Investor Protection Corporation (SIPC) protects you for up to $500,000 if the broker goes out of business.
Scams are primarily an issue when a fraudster approaches you about investing. Never invest in anything that comes from an unsolicited email or message. Even if you get contacted by someone you know, you can check the disciplinary history of brokers and financial advisors for free using the SEC online database.
Even financially savvy people can fall prey to investment scammers using persuasion techniques. If something sounds too good to be true, it probably is. Promises of high gains or huge upsides are likely fraudulent.
While every investment has some degree of risk, which is reflected in its potential return, scammers try to convince you that something is guaranteed and how much better your life will be when you become rich.
Please don't believe anyone who pressures you to buy anything, no matter how nice they may seem. No valid investment comes with a deadline or reason to make a quick decision.
Be sure you understand what you're buying, the fees, and the historical potential return. That information should be clearly stated for mainstream investments like index funds, mutual funds, and exchange-traded funds (ETFs).
LISTEN ALSO: The basics of investing in mutual funds
3. Fear of the unknown.
If you fear investing because you've never done it before, don't understand the jargon, or generally don't feel knowledgeable about it, you can easily overcome it. Investing can seem complicated. But I promise that most successful investors have a fraction of the knowledge of a professional fund manager.
You should have specialized knowledge to buy certain investments directly, like real estate, commodities, precious metals, businesses, or cryptocurrency. But if you want to own a diversified portfolio of stocks and bonds by regularly purchasing shares of one or more funds, you don't need expert knowledge or education.
I often compare investing in the stock market to having a car. They're both vehicles for getting from point A to B. You can successfully own and drive a car without understanding anything under its hood.
However, if you enjoy working on cars, you can tinker under the hood. While some investors like researching companies and tinkering by buying and selling individual securities, the vast majority, including me, don't.
When you regularly purchase shares of diversified investment funds, you'll get where you want to go without ever going under the hood! That buy-and-hold strategy is what I do and recommend for average investors.
One of the biggest misconceptions about investing is that you must watch the markets daily, react to market events, or be an economist. Passive investors, who regularly buy investments regardless of market conditions and hold them for the long run can have great returns with fewer investment fees and emotional stress.
Your time in the market is much more critical for success than trying to time the market. Wise investing happens slowly over decades, not hours or days. While I encourage you to learn about investing, success doesn't require specialized knowledge.
LISTEN ALSO: Debunking 10 costly investing misconceptions
4. Fear of making the wrong decision.
Another fear you might have is fear of making the wrong decision or feeling overwhelmed by your choices. As I mentioned, you'll have a menu of options when you open a retirement or brokerage account. If you don't choose investments, your money typically sits in cash in a money market account, earning very little. So, don’t forget to choose investments.
Some investing firms make it easy to select investments based on factors such as your risk tolerance, age, and financial goals. They might ask you to take a quiz and then recommend a few funds with the right mix of stocks for growth, bonds for guaranteed income, and cash for safety.
If you're a young investor, allow your investment portfolio to grow aggressively to beat inflation and build wealth over a long period. That means you should primarily own funds comprised of stocks, such as index funds, stock mutual funds, or stock ETFs.
As you approach retirement, your strategy should shift from growth to protection. While you still need your nest egg to grow, you may want to own more funds made up of bonds, which pay a fixed return, no matter what happens in the stock market.
If you're unsure which investments to choose, most brokerages and retirement accounts offer free or low-cost help from a representative. They can guide you to the right funds based on how you plan to spend the money, such as retirement or buying a home. If you have a lot of money to invest, I definitely recommend working with a certified financial planner for the highest level of investment planning and tax advice.
RELATED: Am I investing too much for retirement?
5. Fear of not having much to invest.
A common reason for not investing is waiting until you have more money to set aside. You may fear looking bad if you can only afford to invest a small amount. I promise that no one will laugh if you can only invest $10 a month. Most investing firms have no minimum deposit requirements.
Getting into the habit of investing is essential–I recommend automating it. Starting small is better than not starting at all. Once you regularly invest a small amount, it will be easy to invest more.
Building a multi-million dollar retirement account doesn't take a huge income. For instance, if you invest $400 a month for 40 years with a 7% average return, you'll have over $1 million. Discipline, time, and patience are the ingredients for investing success.
However, be sure you have a healthy emergency fund before investing. For instance, keep enough cash in FDIC-insured savings to cover at least several months of living expenses in case of an emergency like losing your job or business income. Remember, the money for short-term needs should never be invested.
Even though investing always involves some risk, how much risk you take is mainly up to you. When you feel scared of investing, think about your future self. Would you regret not having a nest egg to rely on? If you'd rather have more financial security and peace of mind, it's time to begin investing wisely.
RELATED: Investing by lump sum vs dollar cost averaging (DCA)
Before we go, here's a quick reminder to subscribe to The Money Stack, my Substack newsletter, when you visit LauraDAdams.com. It's filled with money tips, tools, news, challenges, and things I enjoy! You can subscribe for free or become a paid member with access to live educational events.
That's all for now. I'll talk to you soon. Until then, here's to living a richer life!
Money Girl is a Quick and Dirty Tips podcast, and I want to thank our fantastic team! Steve Riekeberg audio-engineers the show. Brannan Goetschius is our director of podcasts, Holly Hutchings is our digital operations specialist, Morgan Christianson is our advertising operations specialist, Davina Tomlin is our marketing and publicity associate, and Nathaniel Hoopes is our marketing contractor.