Risk is part of investing. If you’re risk-averse (like me) the thought of taking that risk investing triggers all kinds of red flags and warning lights in your brain. But don’t worry: We’re going to show you a few simple tips that will help you overcome your fear of investing.
It Takes Effort
The first thing you need to know about overcoming the fear of investing is that it takes effort. If you’re risk-averse when it comes to investing, that risk aversion probably developed from some very real experiences.
Those experiences may be financially related. Maybe you or someone you know lost big time in the stock market or in a business investment. Maybe you watched your parents struggle with money and you don’t want that to happen to you.
So you hoard like a squirrel preparing for winter, stuffing your money in a coffee can or in a low interest paying savings account.
Maybe your aversion to risk came from non-financially related experiences. Maybe you’ve suffered some traumas in life (like I have) and risk as a whole just doesn’t sit well with you.
Or maybe it’s multiple reasons working together.
Whatever the reasons, we’re going to talk about how you can overcome the fear of investing and start building a solid financial foundation.
Here are some steps you can take that can help you as you learn how to overcome the fear of investing.
1. Educate Yourself
You may be hesitant to invest because you don’t know a lot about investing. This is why it’s important to educate yourself on the risks and benefits of investing. There are several good investing books out there that are geared toward beginner investors.
One is The Intelligent Investor: The Definitive Book on Value Investing by Benjamin Graham. This book shares wisdom on developing long-term investment strategies that can help shield you from substantial investing errors.
Another good book is The Little Book of Common Sense Investing by John C. Bogle, founder of Vanguard. This book focuses on growing wealth via low-cost index funds, one of my personal favorite investments.
There are a host of other books for beginner investors. The more you learn about investing as a whole, the less scary it will become.
⚠️ One warning: try to stick to educational materials and avoid hype!
2. Test Your Risk Tolerance Level
Another way to help overcome your fear of investing is to test and know your risk tolerance level. Risk tolerance quizzes can help you determine what your real level of risk tolerance is.
You can use that information to better gauge where you should be investing your money.
When I took this risk tolerance quiz from the University of Missouri, I scored a 21. The assessment was that I have a below average tolerance of risk. Knowing this about myself, I chose to make investments that fit my risk tolerance level when I took the next step.
We developed our own risk profile test that takes into consideration not only your risk tolerance but also your risk capacity. If you’re not sure why that’s important read our guide on how to calculate your risk profile before taking the test.
3. Find Investments That Align With Your Risk Level
It’s clear that although I am not completely risk averse, I am mostly risk averse. When you take a risk tolerance quiz you can use that information to your advantage.
Once you determine what your risk tolerance level is, you can go about finding investments that align with that risk tolerance level. For example, those with the lowest level of risk tolerance might choose to put most of their money in a money market account, high-yield savings account, or government bonds.
If you’re like me and have a below average risk tolerance level you might choose to invest your money in index funds and blue chip stocks, once you’ve learned a bit about the different investment choices.
💡 Understanding your risk tolerance level can guide you toward investments that don’t give you reasons to be afraid.
4. Try a Stock Simulator
Many brokers offer paper trading tools and stock simulators that let you manage a mock portfolio with no actual money involved. While your real money grows in low risk investments, try out a few riskier portfolios on a simulator.
Going through the motions of trading without risking any money won’t earn you anything, but you’ll learn a lot about the mechanics of trading and stock movements. Familiarity is a great way to overcome fear.
🤷 If you lose money, it doesn’t matter: it’s not real money. Choose different investments and try again until you’re comfortable enough to try the real thing.
5. Consider Making Some Risky Investments
Another step toward overcoming the fear of investing is to consider making some risky investments. I know that may sound counterintuitive. But remember that “the journey of a thousand miles begins with the first step.”
When assessing the risk of investments you’re considering, remember that the market does fluctuate and that rising and falling values of many investments is normal.
As you become more comfortable with that fact, you won’t panic as much if you see your mutual fund balance fluctuating. In addition, you’ll better be able to curb any temptation to panic sell if the market takes a dive.
If you choose to put some money into investments that are riskier than your usual comfort zone, remember to do three things first:
- Do some research to determine which types of higher-risk investments you’re most comfortable with.
- Determine the amount of money you can handle losing if the investment goes sour (“none” is not an acceptable answer).
- Don’t panic and sell off. Hold it and see what happens.
💡 With apps such as Betterment and Fidelity, you can buy stock and mutual fund shares in fractional amounts, often for as little as $5. That means you can tailor your “risky” investing to any budget.
6. Know How Much Money You’re Comfortable Losing
When you know the answer to that question you can better make investing decisions. And when you’re determining that answer, try and think “big picture.”
How much money do you waste on gaming, or drive-thru runs or lattes each month or year? $500? $1,000? $2,000? When you spend that money, it’s gone.
If you invested that same sum of money, especially in an investment that’s considered low-risk, you have the chance to get it back with a profit. Thinking in different perspectives might just help you convince yourself that some investments are indeed worth the risk.
🤔 If you can “lose” $1,000 a year on coffees, which is a sure bet, maybe you can stomach taking a 50/50 risk by putting $1,000 into a low-cost index fund.
7. Train Your Mind To Look At Fluctuating Markets As Opportunities
This is a tip that has helped me tremendously when it comes to my fear of investing.
Smart investors look at market dives as an opportunity: an opportunity to buy at a lower price than was previously available.
Of course, making the right choices when buying low takes some education. However, making those educated choices can result in a great return on your investment.
👉 Back during the Great Depression real estate was selling for as low as ten cents on the dollar. Those with ample savings used the opportunity to their advantage by purchasing from home and landowners who were eager to sell, and they built great wealth in the process.
8. Run The Long-Term Numbers
Another way to calm your fear of investing could be to simply run the long-term numbers. Show yourself what investment gains can do to your net worth.
👉 $250 per month in a coffee can over a 20-year period will give you $60,000
👉 $250 per month in a mutual fund returning an average of 7% will give you $129,000+
👉 $500 per month in a coffee can over a 20-year period will give you $120,000
👉 $500 per month in an index fund returning an average of 5% will give you $205,000
If you continue your $500 per month plan at the same rate of return for another twenty years you’ll have over $758,000.
That’s over three times what you’d end up with if you stuffed your cash under a mattress or in a coffee can. And more money means more opportunities to gain financial independence.
And while the cynic in you may be thinking “Well, I’d hate to lose $240,000,” just remember: The lower risk investment you choose, the less your risk of losing money. Lower risk investments also typically have lower rates of return.
9. Invest In Hard Assets
I find that hard assets are a more comfortable way to invest, and you might find the same. Hard assets are investments like gold, land, cattle, or real estate.
While the value of hard assets fluctuate, no one can take them away from you if you’ve purchased them outright.
I’ve chosen to invest in real estate and land as a part of my investment portfolio. I can see it. I can touch it. I can walk my land and visit my property. And it’s given me a decent net worth increase over the last two years.
If investing in hard assets feels more palatable to you, consider educating yourself in those investment arenas and putting some money into hard assets.
💡 Rental properties can increase in value and deliver a solid return at the same time.
Fear of investing is natural. Investing is risky, and anyone who isn’t worried about losing money is likely to lose a lot.
The key is to control your fear and use it to help you, rather than letting it control you. If you can turn your fear into sensible skepticism, it can help to protect you against highly risky investments driven by hype or fashion. If you’re afraid of these, that’s not a problem: you should be.
If you control and manage your fear it can help to protect you against bad investments, and you can override it when you make educated decisions that build a sensible long term investment portfolio.
There’s no denying that investing your money involves risk. And for those like me with a lower risk tolerance, that can make investing a real challenge.
Your goal is to assess your risk tolerance, educate yourself about the different investment choices and then choose investments that are right for you.