The Investment Fear Factor: Is Share Trading Too Intimidating For You?
The 1997 and 2008’s economic downturn has left a bad taste in many young investors today. Having gone through the hardship of an economic crisis that hit their parents back when they were young, they would undoubtedly be more careful with their money today, which also translates to being more risk averse.
These bad experiences would inadvertently have shaped their investing decisions today and possibly hinder their future retirement prospects. Their distrust of the investment market coupled with their lack of investing knowledge make them even less confident about stock investing.
As a result, they may end up holding a significant chunk of their portfolio in cash despite low interest rates because they feel that the safety in cash is far more powerful than the risks of the markets. They could equally be struggling with various debt such as student loan, car loan or housing loan, leaving them nothing much for investing in the stock market.
Fear of something can be paralysing and can lead to procrastination in their financial planning. Here are some of the most common fears that one might face when it comes to share trading:
1. “I can lose money quickly.”
To an inexperienced investor, the stock market can seem very unpredictable, with the risk that you could lose money quickly. Unlike the fixed interest credited to your savings or fixed deposit account, gains in the stock market are rarely linear nor do they have characteristics of steady growth over a period.
It is not unheard of for an investor’s investment value to decline even before it starts growing. You could be scared to gamble your hard-earned money in such a complex market. You could fear failure (financially and emotionally) or fear of being exposed as unintelligent for indulging into something that may not be the area of your expertise.
But rest assured, no one can consistently predict when the stock market or individual shares of a company’s stock will rise or fall. So, whether you are new to investing or an experienced investor, you are bound to experience drops in the value of your investments throughout your investment journey. But to fear these would be very short sighted.
As a long-term investor, you should not panic if your investment experience sudden, short-term fluctuations. When tracking the activities of your investments, always look at the bigger picture. Be confident in the quality of your investments, instead of being nervous about the inevitable volatilities of the market in the short-term. You will see a constant trend upwards given you’ve invested in solid stocks.
As unstable as the stock market may look like, if you look at a 5 year period it’s actually appreciated by over 35% or about 7% per year. Better than most fixed deposits!
2. “It is too complicated for a newbie like me.”
Many newbie investors lose money not because the stock market is too complicated but because they don’t have the time to monitor and research to make informed decisions. Hence, they presume stock investing is catered for full-time or professional investors only.
However, it is not impossible for newbie investors to make money in the stock market, if they follow a set of rules. Among them is committing at least one hour a week to research and to read up about the stock market.
This includes diversifying their portfolio and buying stocks that are undervalued, and not purchasing stocks of damaged companies. You can start off by investing a small portion of money that you are comfortable with. You have to expose yourself to some of the fear and allow it to extinguish over time. You can do it gradually in manageable steps.
If you don’t feel that you have the necessary knowledge, get help. Find an independent, fee-based financial advisor to help you make a reasonable return while teaching you about the ins and outs of the market. That person can hold your hand and reassure you when you’re nervous about something you’ve read in the news or seen in your accounts. This can be another way to overcome the fear of investing.
3. “I don’t want to invest in something I don’t know.”
It’s common advice to never invest in anything you don’t understand. As a new investor, you may tend to harp on the fact that you have no knowledge or expertise to invest in stocks.
But understanding often follows action. So, if you are a newbie, you may purchase stocks through unit trust funds without fully comprehending what you are buying. Later, you may notice that the fund value increases when the index rises and decreases on the days that it falls. Eventually, you grasp the correlation and later be able to invest in investments you understand. Knowledge is power. With the Internet, knowledge to invest these days is freely available.
Educate yourself about investing before making a move. However, stay away from investments that are portrayed as high return, low risk, complex, or available to an exclusive list of people as these are likely to be speculative investments at best or fraudulent schemes at worst. It’s easy to get caught up in a wave of what may be the next easy thing to cash in on. Trust us, if you’re reading about it online you’re already too late to the game and you’re more likely to get burned. Always invest based on strong fundamentals not rumours.
4. “I need a large amount of capital to invest.”
It takes money to make money – you have no doubt heard that phrase thrown around before. It’s a saying that unfortunately stops people from investing before they even start. The idea that you need to have a lot of money before you’re able to invest is all too common, and it’s simply not true.
You can kick start your investment journey with just RM1,000!
You can start small and slowly build your returns over time. Another way you can start small, and build up your investment over time is using the Ringgit cost averaging method.
How can you overcome these fears?
Before you decide to throw in thousands of Ringgit into the stock market, it is best to do your research and learn how the stock market works. When it comes to investment, throwing caution to the wind is definitely not your best approach.
Investing in stocks can be tricky business. Watching the stock markets rise and fall, you can imagine why a total beginner might be frozen with fear. There are several things that investors should be aware of before committing any money to the stock market.
- Decide what you want to achieve, how long you are planning to invest for and how much risk you are prepared to take. This will help you decide which stocks are appropriate.
- The market won’t always go in your favour and you must be prepared to see your investment drop. You must understand your tolerance to risk rather than appetite for reward.
- Investors must understand the structure of the investment by looking at the fund factsheet.
- Seek proper and independent advice from a financial adviser before making any investment decisions.
- Timing the market is impossible. Instead, look to invest regular premiums on a monthly. By drip-feeding money in, it’s possible to negate the risk of market timing. If the market falls, the regular premium will simply buy shares at a cheaper price the following month.
- Investments should be held for at least five years to smooth out any bumps in the market. Review investments every six months to ensure they are performing in line with expectations. If they aren’t, try and understand why and then look to make changes if appropriate.
There are risks involved in any investment, but by understanding what you are investing in, you are able to take calculated risks, and be able to manage the risks better.
No risk means no return. People who wait too long to invest may not be able to achieve their financial goals and others who don’t understand investing may end up with portfolios that are losing money. Take the challenge and become a victor in your investment!