Thursday, January 14, 2016

How to Overcome Your Investing Fears

So you’d like to invest in stocks but you’ve got cold feet because of all the horror stories you’ve heard. You turn on the news and learn about somebody who lost a fortune in the stock market when a certain stock tanked. You might know someone personally who lost retirement money because the market took a nosedive. You’ve heard tales of wily hedge fund managers who manipulate the markets for their ultra-rich clients.

What are you to do? You want to make money but you don’t want to be a victim.

Here are a few steps you can take to overcome your investing fears.

1. Realize That Taking Some Loss Is Part of the Equation

Nobody bats a thousand when it comes to investing. Even some of the best investors in the world buy bad stocks and skip out on stocks worth investing in.

For example, famous billionaire investor Warren Buffet once invested in USAir. That was one of his (few) bad choices. He still made a fortune on his other investments, though.

The example of Buffet illustrates the fact that nobody is going to get it right every single time. If you decide to invest in the stock market, accept the fact that you’re going to take some losses.

However, your gains from sound investment decisions should trump your losses.

2. Diversify

You might have heard stories about people who invested in Enron years ago and then lost everything when that company went belly-up. It’s easy to sympathize with those people because of some of the unethical behavior of the company’s management that led to Enron’s demise.

However, those people committed a fatal financial flaw. They didn’t diversify.

Without sounding too insensitive, why did those people have all of their life savings in one stock? Why didn’t they spread their money around multiple investments?

Think about it. If some of those Enron investors had kept 10% of their money in Enron and put the other 90% into an index fund, they wouldn’t have lost everything.

If you’re fearful of taking a huge loss in the stock market, be sure to diversify your investments across multiple stocks. Also, buy some bonds and keep a little money in cash.

Finally, if you’re interested in socially responsible investing, then be sure that your portfolio includes the stocks of companies that are in line with your values.

3. Invest Over Time

Once you’ve overcome your initial fear of investing and decided to take the plunge, you might be tempted to put all of your money into a variety of stocks in one day. Resist that temptation.

Why? Because if the stock market tanks on the following day, you stand to lose a lot of money. Yes, that can even happen even if you’re well diversified.

Instead, invest over time. Put a little bit of your money into a few stocks the first day. Then, wait a few days and put some more of your money into the same stocks. Repeat that routine over time.

That way, the market suddenly tanks after you start investing, you’ll still have plenty of money in cash.

It’s normal to be fearful of losing money. Certainly, that can happen if you invest in the stock market. However, with a sound investment strategy you can minimize that risk.

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