Although we don’t like to admit it, fear can often motivate our investment decisions. That’s understandable — the thought of losing even a portion of your savings can be scary. But unfortunately, fear can distort reason and sound analysis, causing investors to ignore both risks and opportunities of investing. It can also lead to “financial paralysis” — when an investor is so afraid of making the wrong decisions, they fail to make any decisions at all.
On Tuesday, February 27 this year, the Dow Jones Industrial Average dropped 416 points—the markets sharpest drop in three years. Two emotions—fear and greed—can lead to bad investment decisions
Here are some quick tips to help overcome anxiety and fear, and allow you to take control of your investment future.
Investing can be dangerous yet profitable endeavor. Many people have been burnt and decide not to ever invest again. This is the primary fear for investing in anything. They may give you excuse such as ‘I don’t have enough money’ or ‘I don’t know where to invest’. But the number one fear is always the fear of losing money. If a novice investor knows that he won’t lose money, he must have used all means necessary (such as loan) to buy as much investment opportunity possible.
Investing here can mean a lot of things from buying gold coin to real estate. There are several ways of how to reduce your fear of investing in common stock.
Get Educated: When you know more about something, you are more certain of your outcome. When you know how to calculate the fair value of a common stock, you will know your expected return of investment. Remember that the less uncertainty you have, the less risk you undertake. You will also know more about the downside risk of your investment. If a common stock has $ 3 per share of positive net cash, is profitable and is currently trading at $ 5 per share, then you know that it won’t trade at below $ 3 per share for a long period of time. Your maximum possible risk here is 40% of your original investment.
Start Small: When you begin your investing journey, you have a lot of unknowns. Less education means more unknown which means greater risk. How small should you start? As much money that you can afford to lose. If you still have no idea, then how about $ 1 a day? One dollar a day will give you $ 500,000 after fifty years of investing with 10.5 % return. Even if you have $ 500,000 right now, it is better for you to start small if you are a novice investor.
Pay Yourself First: means that you find investment that can pay you first as investors. What investment can pay you first? One thing that comes to mind is buying a common stock that historically has steady or increasing dividends. There is one more way to pay yourself first by selling covered call options. For novice investors, however, I suggest we put this subject of selling covered call options off until you get really really comfortable with investing in common stock.
Learn From Your Mistakes: Once you begin investing, the fear of losing money is always there. The best ways to learn is from your own mistake, but do not to hasten your learning curve.
Will you be fear-free after reading this column? The answer is no. Fear is always there because of uncertainty. Successful investing is about predicting the future which is uncertain. Even investing in your money-market account is uncertain. It involves some small risk. The risk might be inflation being higher than the interest rate offered. There is also uncertainty regarding the direction of interest rate. Interest rate used to be in the high single digits during the 1980s. Look where it is now.
We live in uncertain world. Instead of hiding behind the wall, we need to embrace it and educate ourselves to reduce the uncertainty. Doing this will in effect increase our investment return beyond the rate of inflation