Welcome to the wonderful world of investing! You’ve taken the time to dip your toes in the pool and have likely learned some new vocabulary words and financial concepts.
Along with this new information, you may have also developed a fear of investing. Don’t worry, this anxiety is common among new investors and usually passes over time.
Fear, anxiety, and worry usually fade with exposure and education. In this article, we’ll take a look at some common investing fears and learn how to overcome them.
During this eye-opening journey, you’ll see that many of the biggest and most common fears are based on myth and speculation. Let’s get started!
Too Many Investment Choices
New investors often feel overwhelmed. There are simply too many types of investments to fully understand them all.
While the burden of trying to understand so many investment vehicles is quite common, it’s certainly no reason to quit!
With just a little education, even the newest investors can confidently choose an investment account.
The first step in dissecting the multitude of investment vehicles is to determine your investment goal. This easy disqualification process will help you quickly narrow down the number of appropriate investment choices.
Uncertainty Making Stock Selections
When you’re confronted with stuff you don’t know, focus on what you do know and start from there.
There are several ways to select stocks and other investment options. Remember that your time horizon, or how long you plan to invest the money, is the best guide for choosing investment options.
Consider how much money you want to invest. Do you plan to invest it all in one lump sum or incrementally over a long period?
In addition to how much and how often you’ll be putting money into investments, you should consider when you’ll need to take money out of an investment.
Your time horizon will be an important factor. The anticipated investment period will affect a few different behavior patterns.
Let’s explain further.
Suppose you make a purchase using a credit card that offers a six-month repayment plan with no interest. Of course, the catch is that you must re-pay the balance in full at the end of the promotional period, or you’ll be responsible for all the accrued interest.
If you wanted to invest the money instead of paying for your purchase in cash, you would have a very short time horizon. Six months or less is probably not enough time to consider high-risk investments because the potential for loss is too great.
Based on what we have learned so far, which investment options would suit someone who plans to withdraw the funds within one year? More on this later.
Conversely, if you’re planning for a home purchase and your time horizon is three to five years, new opportunities become available. There are plenty of suitable stocks and investments available.
Investors who aren’t keen on making too many changes would probably select some stable large-cap companies. Many recognizable companies even pay dividends.
Dividend payments produce income from a stock without taking too much risk to obtain the potential reward. Earnings, or the increase in stock price between the time you buy it and the time you sell it, is a bit of a different story.
Depending on your risk tolerance, you could also invest in energy, technology, international, and other market sectors with a higher than average growth rate.
These sectors are often cyclical, and there is no way to guarantee what will be considered the hot new genre for investments.
Within one or two years, you should evaluate your progress and determine if it is best to stay invested where you are or make some changes to protect the down payment on your dream home.
While you don’t have to become a day trader or glue yourself to stock market feeds, it helps to understand how to follow the market updates.
Cannot Follow Market Movements
One of the biggest fears for new investors is following the market. Many people are so intimidated by the number of different investment platforms that they simply never get started.
Let’s unpack this fear of market movement. Yes, investors are likely to see movement throughout any given trading day.
Sometimes these wild swings or periods of high activity seem scary. The collective ups and downs are known as market volatility, which is common among any active market.
Extremely volatile markets make most investors feel a little squeamish. It’s so important to understand that not every market change affects your investments.
If you want to track your investments, be sure that you are looking at your actual investments and not a market index. Only what is in your portfolio truly affects your investment outcome.
Various market sectors, such as healthcare or transportation, often experience the same general trends.
As long as your portfolio’s underlying investments are on par with similar options within the industry, there’s no reason to fear. This normal trading activity results in prices that change every few minutes.
If you really just cannot bear to see the daily ups and downs, you may need to rethink if stock market investments are the right choice for you. An investment advisor could assist you with your investments and keep you out of the daily decisions.
The average daily movement is unimportant to your overall portfolio, especially if you’re not planning to make an immediate change.
One of the worst mistakes an investor can make is to make a significant investment decision based on emotion. This leads us to our next common fear that investors report.
Life is about making mistakes and learning from them. Experts in every field and industry will admit to some major mistake or a series of small blunders.
Ultimately, the mistakes we make in our daily living prepare us for what’s to come. Mistakes actually take the fear out of the unknown.
Fearing a mistake in your investment portfolio is slightly different. In this circumstance, fear can be a dangerous state.
It’s actually challenging to make a real trading mistake during your investment career. Technical mistakes such as choosing the wrong dollar amount or trading quantity are oversights, but you can catch even these during the trade confirmation.
People who don’t invest because they are afraid of making a mistake in choosing an investment overlook a very simple concept. You can always sell an investment if you feel it wasn’t the right decision.
As long as you sell for a price that is the same or higher than you paid, you haven’t made a mistake. The only way to make a selling mistake is to panic when you see the market dropping and dump all your shares at a steadily plummeting price.
Losing All Invested Money
Before we discuss the potential for losses, we should have one quick review. Calls and puts are for investors who have experience or practice with investments.
If you aren’t sure how something works when it comes to trading, research before putting your money to work. It’s tough to lose all the principal you invest.
Remember that you aren’t holding a dollar value but rather a share of a stock, bond, or mutual fund. The difference is huge, so try to get this concept.
You own the same number of shares no matter how much it’s worth at any given time. Let the market work itself into a frenzy of activity while you stand back and watch.
The prices stabilize almost every single time. As long as you know that your investments are appropriate for your risk tolerance and time horizon, there is no need to make a change.
Taxability of Investments
Some investors worry about understanding and paying taxes on their investments. This can be a little tricky, but there are a few simple guidelines.
Not every transaction represents a taxable event. Even some of your earnings may be considered unrealized gains if you do not sell shares.
Your broker or investment platform will send you tax forms to outline any activity you conducted during the year. In some cases, earnings and dividend payments may be considered taxable.
If you have any questions regarding your investment portfolio and its tax liability, consult a tax professional to review.