Research has shown that confidence in owning stocks is poor compared with other investments. For many, the fear of investing hard-earned cash into a volatile stock market and the risk of watching it disappear is too great.
Some of this fear stems from the 2008 financial crisis when people in their droves shifted from higher-risk to lower-risk investments such as savings accounts. Yet, the stock market is much better compounder of wealth than cash and provides an opportunity for greater returns on any money invested over time.
Fear in investment comes in many forms. There is risk aversion, concern about not knowing enough about the market, mistrust of brokers as well as the misguided notion that you have to be wealthy to be an investor.
So how can an investor overcome the drivers of this fear?
Investing without fear
The latest Gallup poll of American households highlighted the diminished view of the stock market. It found that only 54% of households own stocks, down from 62% before the financial crisis and that many only own small amounts of stock.
Stock ownership was also strongly related to age. Young people were not as confident as older adults in using stocks as a long-term investment.
Charles Biderman, chairman of TrimTabs Investment Research, a firm that measures the market’s health based on cash flows in and out of stocks, says this is because Millennials will be just as hesitant to invest in stocks as the generation that grew up during the Great Depression after the 1929 stock market crash.
A Capital One ShareBuilder survey backed up his theory. It found that 93% of millennials distrusted the markets. Of interest, it was a lack of investment knowledge that made them less confident about investing. The industry's complex jargon, perceived high fees and lack of transparency also played a role in their investment fear.
Too much choice
One reason why investing seems so complicated is because there is so much choice. As well as stocks and mutual funds, there are options, futures, property and precious metals. It is well documented that too much choice can be overwhelming and keeps people from making a decision. When we feel confused about what to do, we tend to do nothing.
Yet Laura Adams, a personal finance expert says making money from investments, no matter how complex a financial instrument, comes down to two basic concepts: being either an owner or a loaner.
When you own assets that appreciate in value you can sell them for a profit or take out profits in the form of dividends. And when you loan money you earn interest until the original debt is repaid in full.
Cutting through the confusion and keeping strategies simple can make investing seem less complicated and risky.
Where to start investing?
A low tolerance to risk can lead to investment fear and this is why it is important to establish your individual appetite to risk and also how much you can afford to lose before you invest.
Low risk investments can be a good place to start and range from saving bonds, cash on deposit, annuities, peer-to-peer platforms and dividend-paying stocks.
Small investment opportunities can also come in the form of exchange-traded funds (ETFs). They combine the benefits of investment funds and shares and give you a guaranteed exposure to the stock market for minimal fees.
Are you too poor to invest?
New York University economist Edward Wolff conducted a study of stock ownership in 2013 and found that 81% of the stock market worth is concentrated in the top 10% of households by wealth. This has now risen to 84% of the stock in the US owned by the top 10% of households by net wealth. The bottom 80% of households own only about 7% of stock.
However, there are now a number of online investment platforms, known as “robo advisors“, that offer professional management of portfolios for small investors with very low fees. A portfolio is usually created with an allocation that includes several different ETFs. You can open up an account by committing to monthly contributions of as little as £100.
Don’t be afraid to start small while you are learning and as confidence grows, larger profits can be generated by investing greater sums of cash.
Another way to eliminate fear of something is to learn more about it. Knowledge is essential for effective stock market trading and it is important to at least learn the basics about how markets behave.
The internet means that there is much more information available for investors today. It has never been easier to look into examples of various trading strategies online, and apply your own skills and approach and preferences.
Experts say that it is essential to plan ahead, but at first to keep it simple. That way you can slowly adjust your approach over time so that you refine your own personal strategy until you are comfortable with it.
Don’t get disheartened
There is an old saying: time in the market, not timing the market. This means that you need to approach stock investing from a long-term perspective. Everyone loses money at some point in investing. That’s why it is important to play the long game.
Jason Thomas, chief economist at AssetMark, said that portfolios of stocks should be viewed like a family business — built over time, with an eye to the long-term.
Stock markets are currently suffering a long-awaited and predicted correction and the worse reaction to this would be to panic sell and let fear get the better of you.
According to Tony Robbins, business strategist and author, on average, there’s been a market correction every year since 1900. This shows that corrections are just a routine part of owning stocks. Instead of living in fear of corrections, you have to accept them as regular occurrences.
Specialising in areas you know
The unknown often makes us fearful and that is why it is useful to invest in areas that we know something about.
One of the easiest ways to make an avoidable mistake is getting involved in investments that are overly complex. Warren Buffett famously said to “Never invest in a business you cannot understand.” You need to at least know enough about them to be able to explain how they make money and how the business model works.
Fear of losing money is one of the biggest reasons that people refrain from investing. It is can also unduly influence perceptions of risk. This aversion to losses and a determination to avoid them can cloud our judgment and leave us unwilling to take even the most sensible risks in the interest of seeing improved returns over time.
Cognitive biases are an inescapable part of being human. Therefore, it is important to understand and overcome, common human cognitive or psychological biases that often lead to poor decisions and investment mistakes.
Whether we like it or not, investing in the stock market does entail an element of uncertainty. However, the more you learn, the less intimidating it becomes. And, the more confident you become, the more you will invest. By recognising the role of emotion and keeping strategies simple, investing should become much less daunting.
Whatever your fear, there’s no need to stop yourself investing. Educating yourself could help. Your first port of call should be our education courses https://capital.com/online-finance-courses. Go for it.