Note: this is a follow-up to the previous post, which, in case you missed it, can be found here.)
[Edit: Interesting how timing sometimes works out. A guest post I wrote for Get Rich Slowly a while ago just happened to run yesterday, right in the middle of this mini-series about risk. The article elaborates a little on the topic of bonds, something those who read the free Investing Basics series might recognize as one of the less risky investment options out there.
The comments to that post are revealing: several commenters lament the fact that there are no risk-free investments. In the coming two weeks we’ll be looking at bond risk more closely but let’s first finalize getting our arms around the notion of you as as a gambler.]
Who hasn’t heard people say they avoid investing, because “it’s just a gamble” or “it’s just a casino out there?” Here’s a quote from just this past week: “…for those of us without much wealth — who see money as what we use to pay bills and eat food — even the remotest possibility of losing it all sounds frightening.”
The fear of losing money investing is real, and all of us have it.
Fear itself is not the problem. (In fact, it’s probably healthy, because it keeps us careful.) The problem is…
What do you do in response to the fear?
You can respond to the uncertainty of your financial future, the fear of losing it all, the risk, call it what you will, in one of two ways:
- Avoid it
- Embrace it
A. Avoid It
The only way to avoid the fear of “losing everything” is to not invest at all, but that’s a lot like amputating your arm for fear of hitting your fingernail with a hammer. It’s an effective strategy, because that way, you don’t have a fingernail to hit… but at what cost?
So… doing no investing will avoid the risk of losing money from investments.
But how will that help your future? Can keeping your money under your mattress leave you in a better position than investing it? Sadly, no.
You don’t need to be a rocket scientist to know… avoiding all risk is not an option to anyone for anything. Risk is inherent in any activity involving the future: going to work, crossing a street, flying, eating… anything.
That’s the bad news.
The good news is, as we saw in the previous post, you already are adept at responding to the uncertainties in other parts of your life. Perhaps without articulating it, you have developed the ability to calculate the odds that this or that course of action will yield the best results.
Therefore, you already have what it takes for your only realistic strategy to cope with the fear of investing:
B. Embrace it
You will only succeed in your financial future if you embrace the uncertainty in it, just as you embrace the uncertainty with so many other aspects of your life. That doesn’t mean you have to like it, just that don’t flee from it.
How do you embrace the risk, the uncertainty, in all these other parts of your future?
1. You learn
You run the risk of losing your job tomorrow, next week or next month. To avoid that fate, you have learned what it takes to succeed at your job. Part of this involves technical skill, part office politics, and perhaps even some academic preparation.
2. You stay up to date
You run the risk of eating poisoned food every day. In order to avoid that, you listen to the news to find out if there’s another recall on contaminated tomatoes or chicken.
3. You develop options
You run the risk of a power outage at home. So you store a few gallons of water and some supplies. (You do, don’t you? :)) For your work, you keep your ear open for new opportunities for promotion or for simple escape.
4. You read the instructions/labels
You run the risk of getting traffic tickets. To avoid that, you read the posted signs and obey them (kind of). You read the labels on food packaging. You do what they tell you at work.
And so you see: you’re already a veteran of accepting the risks we all face on many fronts.
What’s one more?
All that’s different when it comes to fear of investing, the fear of losing it all, is: the topic is new.
Here’s What You Do
1. Accept it
You start by coming to grips with the nasty fact of life that in life nothing is risk-free… nothing! Not going to work, and not investing. Even breathing can be hazardous to your health.
You can try to avoid all investing risk by not investing but that is very expensive, because all it does is guarantee failure. Which is better: guaranteed failure or a much smaller possibility of failure? Because those are the only two options.
Investing is not rocket science, and I’m not smarter than you. Millions of people do it successfully every day. You’re doing the right thing right now, learning more about investing. Just like with your job, your health, and even your marriage, the more you learn, the better your chances of succeeding.
3. Develop options
There are many more things to invest in than stocks, which seems to be the default association many people make. Learn about real estate and other types of investments. Nobody wrote a letter from heaven saying you only can invest in this or that.
Even in your investment of choice, look at the variations. Real estate can be a home, a shopping center or apartments. Stocks can be blue chippers, dividend aristocrats, growth stocks or value stocks, and bonds come with various risk/reward labels attached to them.
No two people have the same risk profile, and there is a good investment for everyone.
4. Accept imperfection
This just in: you’re not perfect, and neither is anything you do. You may be a good person, do a good job, and be a good spouse and parent. But you’re not perfect.
Don’t expect your investments to work out perfectly. I can tell you in advance: they won’t. That’s the bad news.
The good news is investing is not an exam, where you fail when you get less than a D. There are no exams or standards. The only standard is that you emerge with one dollar more than when you started, and that’s the easiest Pass you will ever get in your life.
Naturally you want to make as much as you can, and naturally you’ll shoot for more than just one dollar in total gains. But the point is if you understand even just the basics of any form of investing, you’ll come out ahead, even after a misstep or two.
Certainly better off than if you never invested.
Remember the story of the young lady in the party boat? (“What kind of girl do you think I am?”) Well, you’re a gambler, someone who takes risks in order to get ahead. The areas in which you take risks are many: work, health, recreation, love, driving, flying, sharing a secret… the list is endless.
Now that we’ve established you’re a risk taker, now all we’re talking is: is investing on that list?
NOT investing is a surefire recipe for financial disaster. (No uncertainty there, you’re guaranteed to fail.)
You’re smarter than that. You have a healthy fear of losing money. (Warren Buffett’s rule #1 and rule #2 we mentioned in an earlier post).
So you apply the strategies you learned in other walks of life to your investing. And, as you get more comfortable with investing, you get better at it… and you end up way ahead of where you started.