Monday, October 31, 2016

How to Overcome Investment Anxiety or Fear

Investing can be nerve wrecking, especially if you are new to it or just getting your feet wet for the first time. However, in today's modern age of internet and easy access to information, it is much easier to get started and do well. 


The trick to success is to start slow and build confidence over time before thinking you can trade like guys on Wall Street. Besides, in my opinion one should never trade like the Wall Street guys unless they are a professional trader or some hedge fund manager. Instead slow and steady is the way to go for an average Joe when it comes to investing in stock market. 

I think it's normal and understandable why most people are scared or have anxiety regarding investing in stock market. Stock market is known to crash every now and then and there are enough gloom and doom stories in news on daily basis to make us suspicious or anxious of stock market.

However, historically the S&P 500 (US Stock Market Index consisting of 500 companies) had been able to make average nominal returns of 12% (including dividends) and 9% real return when adjusting for inflation for about the last 50 years. This should give you some solace and general confidence in long-term prospects of stock market. 

Here are some suggestions that may help you gain confidence in investing in stock market and get through the initial phase of anxiety and nervousness when investing by yourself:

Start with Baby Steps
Don't try to be a hero and try to make a big killing in stock market by investing all your hard earned money in one big trade, no matter if you got the advice directly from Janet Yellen :) 

Instead start with small or even tiny trades to get a feel for the price fluctuations of stock market. Your trades should be small enough and spread over several days or weeks so you can buy shares at various price points while market fluctuates. It will help you desensitize yourself from small fluctuations in market. I would suggest set aside a small sum of money for this activity. Call it Learner Money.

Use this Learner Money to gain some experience in buying shares and getting a feel for your broker's provided tools and trading process. At minimum, it will help you gain some confidence in how to place and execute a trade through your brokerage account.

If you have opened a brand new investment account with any of the major brokerage firms, chances are you will some free trades in your account. So use those free trades for this exercise. There are also NTF (no-transaction-fee) Index Funds that you can use, check with your brokerage.

Don't let fear paralyze you, instead start building your confidence by investing in baby steps, so you are ready when the next big investment opportunity knocks such as a major market correction.

Do Your Own Research Before Investing
If you were to spend thousands of dollars on something like a car purchase, you would spend considerable amount of time researching fair value of the car, checking out its maintenance records, and taking the car out for a test drive before you even make an offer and write a check to the dealer.

Think of investing in stocks as a big ticket item purchase that requires some upfront effort in the form of research and determination of current fair value and future value.

However, unlike buying a car where there is lengthy process that one must go through, when buying a stock you can spend all the money you have in your brokerage account almost instantly without doing any research. With a touch of a button, your entire brokerage deposit can be all converted into shares in some company. Also, once submitted, the transaction executes instantaneously and cannot be rolled-back. If you made an investment without doing basic due diligence, you may end up with an investment that doesn't perform well or worse declines in value over time.

Regardless whether you invest in individual stocks or Index Funds, there is some level of research needed. For Index Fund investment, at minimum you should understand what the Index Fund is invested in or how it is put together, what is the multi-year performance, net asset value (NAV), and net cost/expense. Also, some funds have restrictions on how soon you can sell them without incurring penalties. All of this information can be found easily and free online and in the fund's prospectus.

Having done basic amount of research will give you some confidence in what you are buying and what to expect and would also help you avoid any unpleasant surprises down the road.

Focus on Long-Term Growth
Sure, stock markets do crash and sometimes go into a multi-year recession; however, almost always they tend to bounce back stronger. People who take advantage of such crash events by investing in quality stocks or indexes when market is down 10%, 20%, or even 40% during recession, tend to make huge profits over-time. As an example, just investing in the S&P 500 low cost Index during the 2009 crash would have returned 224% (including dividends).

Even small dips or corrections in market tend to smooth out over time and can provide very nice returns. Therefore, focus on long-term while looking for dips in market for buying opportunities.


Don't Try To Be a Stock Picker Unless You Really Want To
You don't have to be a stock picker to take advantage of the growing stock market or a bounce back from a major correction. All you need is a low cost way to participate in the stock market, and Index Funds are best suited for that. 

There are several well known and popular S&P 500 Index Funds such as ticker: SPY (the biggest of all), IVV, and VOO available to general public, some of them may even be offered without any transaction cost from your broker. For example, Fidelity offers IVV as a No-Transaction-Fund, meaning you don't pay any commission or fees for buying or selling shares of IVV.  I have covered Index Funds in detail in my earlier posts such as this one: My Favorite S&P 500 Index Funds, so check it out if you are interested.

In short, investing in a market Index Fund can greatly reduce the stress and anxiety related to picking the right stock. Face it, most people don't have the time, energy, know-how, or interest in picking stocks and why there are professional investment firms and advisors to help them. Such firms can charge exorbitant amount of fees to manage your investments. In my opinion, they are well suited for high wealth individuals who have millions of dollars to invest.

For an average Joe investor, an Index Fund based investment seems to be the best of both worlds where one gets to invest in the market but without the high cost of professional management and without too much time spent on research.

So unless you really want to dedicate yourself in learning about stock picking, sticking to Index Funds is a far better and less stressful path for most people.

Most Important: Don't Panic When Market Crashes
People lose more money by selling low during a crash or correction than by picking a bad investment. Remember, that corrections and crashes in stock market are short-term reactions to some adverse economic or global events. With time, these events get resolved and the stock market bounces back to its intrinsic value and starts to grow again.

Imagine all the people who panic-sold their stocks during the housing /market crash of 2008/2009, they not only lost a significant portion of their invested net worth but also missed out on one of the biggest growth periods in recent history as they kept on the sidelines while market grew at double digit return after the recession.

So don't panic when market crashes and instead look at it as an opportunity to invest for bigger returns.

Last Word
It's only scary to invest if you look at short-term horizon for your investments. Train yourself to think long-term when investing in stock market as it will help you overcome anxiety or getting jittery when investing. Break down your investments in smaller chunks (i.e. dollar-cost-average) as it will help you not only gain confidence in investing, but also smooth out short-term dips/spikes in price fluctuations. It always helps to look at historic charts and see how markets recovered in the previous downturns or corrections. Also, never invest money in stock market that you need in short-term. See my earlier post: Are You Ready To Invest in Stock Market?

Disclaimer: Author of this article is not a licensed/registered financial or investment advisor and does not provide investment advice. This article is for informational purpose only. Please use your own judgment or seek a licensed financial advisor before investing. You, the reader, bear responsibility for your own investment and financial decisions.  


4 comments:

  1. Since I'm a couple of years away from retirement I'm perfectly ok if the market drops :) It means I get to buy cheaper shares when I dollar cost average. So bring on volatility!!!

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  2. Yup, even though I am retired, market drop doesn't bother me as I look at it as an opportunity to buy more of high quality stocks. Besides dividends are not affected by market fluctuations and why I like to invest in divi stocks. I just picked up some shares of Abbvie today at a nice discount and yield.

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  3. Your statement implies that you have a substantial cash position available to deploy into stocks during market drops. So I am curious about your asset allocation. Will you be writing about this?

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  4. Yes, I try to keep around 5%-10% of my total allocation in cash at all times; mainly to take advantage of any sudden market corrections/drops. I will write about my allocation in a blog entry soon. Thanks for reading.

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