Investing is essential for wealth building, but perhaps you have concerns that keep you from investing. Your concerns are legitimate. There are risks to investing.
People have lost money, sometimes a lot of money, while investing in the stock market. But the fact remains that there are few other ways to consistently beat inflation and grow your money enough to support you in retirement.
If you take some time to understand the risks and the safeguards you can put in place to address those risks, you will likely feel more comfortable investing.
Let's take a look at some common concerns that hold you back from investing and how you can overcome those concerns so that you can begin your investing adventure.
I Don't Understand Investing
You feel that you don't have enough knowledge about investing in general to start investing. You are worried that you might make a mistake and lose money. The solution?
Education: Educate yourself about the basics of investing. There are many online resources, podcasts, and books that can help you understand investment concepts.
Check out our free investing course.
Online Resources: Investopedia or resources offered by brokerages like Fidelity, Vanguard, or Schwab.
Podcasts: Afford Anything with Paula Pant, ChooseFI with Brad Barrett, I Will Teach You To Be Rich with Ramit Sethi, Financial Feminist with Tori Dunlap, or Ready For Retirement with James Conole.
Books: The Simple Path To Wealth by JL Collins or Money Honey by Rachel Richards. Many of the podcast authors also have books if you find a host that really resonates with you.
Start Small: Don't put your entire life savings in a single stock. If the thought of investing with real money is too stressful, start with a virtual portfolio to practice investing. This can help you gain confidence and experience. Alternatively, you can invest a small amount of money that you can afford to lose while you learn the ins and outs of investing. Realize that you will likely make a mistake. Give yourself grace and learn from it.
Get Support: You don't have to do this alone. Join investment clubs or online forums where you can discuss investment ideas and strategies with experienced investors. Just remember that something a stranger recommends on the internet is not necessarily true or wise. Verify everything. Consider working with a fee-only financial advisor or planner who can provide personalized guidance and answer your questions.
Investing Is Too Risky
You are worried that you will lose the hard-earned money that you have saved if you put it in the stock market. There are a few ways to reduce this risk:
Diversify: Diversification involves spreading your investments across multiple companies in different asset classes (stocks, bonds, real estate, etc.) to reduce risk. By choosing investments that are not correlated (influenced by the same things), you will reduce the overall risk of your portfolio.
Long-Term Timeline: Understand that investing is typically a long-term endeavor. The longer you stay in the market (we're talking 20+ years) the higher the probability that you will make money. You may appear to lose money in the short term, but if you do not sell, you won't really lose any money. You still own the same number of shares. The value of those shares is simply fluctuating. That being said, investing with a timeline of less than 5 years is generally not recommended.
Dollar-Cost Average: Rather than investing a lump sum all at once, consider dollar-cost averaging. This means investing a fixed amount at regular intervals, which can help reduce the impact of market volatility. You can do this with each paycheck, or by simply breaking up a windfall or inheritance into multiple smaller batches to invest.
Rebalance Periodically: Rebalancing your portfolio consists of selling investments that have done well to buy investments that have not performed as well. Because investments grow at different rates, your portfolio will inevitably become unbalanced. Your desired asset allocation is one that should take your risk tolerance and timeline into account. By rebalancing your investments, you shift your portfolio back to the allocation that matches your plan so that one investment doesn't become too much of your portfolio.
The only time this is not necessary is if you own a single total stock market fund. However, once you add your bond fund near retirement, you will need to start to rebalance your portfolio periodically.
Emergency Fund: Ensure you have an emergency fund in a high-yield savings account to cover 3-6 months of expenses. If you are about to retire or in retirement, you may want to increase the amount to cover a year or two of expenses.
Risk Tolerance: Evaluate your risk tolerance. If you are panicking when the market crashes or unable to sleep at night, then adjust your portfolio to a more conservative allocation. Try not to make emotional adjustments in the midst of a crash as this could lock in your losses. However, take note of your discomfort and plan to change your allocation after the market recovers.
I Don't Know What To Invest In
There are so many different companies and investment opportunities to consider, and you feel overwhelmed. The key to knowing what to invest in is to know yourself. What are your goals and risk tolerance? When do you need this money? Do you have multiple goals? What type of account are you investing in? How much do you need it to grow? How complex do you want to get? Are you comfortable rebalancing a portfolio? The right investments for you may be the wrong investments for someone else. Here are a few ways to address this fear:
Index Funds and Exchange Traded Funds (ETFs): Index funds and ETFs are passively managed, low-cost investments that allow you to diversify your investments easily by investing in a large number of companies. You can choose very broad investments like the total stock market, or you can choose multiple smaller investments based on company size, international, real estate, or bonds. The fees for index funds and ETFs usually consist of an expense ratio that is less than .25%. Index funds and ETFs tend to perform just as well as actively managed funds over a long time period.
Research: Take the time to research and understand the investments in which you are interested. Look at historical performance, fees, and the underlying assets. Be aware that just because something performed well in the past does not mean it will do well in the future. Choose your investments carefully, considering their role in your overall portfolio.
Consult Experts: Consider seeking advice from a fee-only financial advisor or planner. They can provide personalized advice based on your entire financial picture. Robo-advisors can also recommend diversified portfolios based on your risk tolerance and goals. Be sure to understand any fees associated with these services. If using a robo-advisor, take a look at the underlying investments that will make up the recommended portfolio to make sure they are comprised of investments and cash amounts with which you are comfortable.
Set Realistic Expectations: Understand that all investments carry some degree of risk, and there is no guarantee of returns. Be cautious of investment opportunities that promise unusually high returns with little or no risk. Remember that stock market fads are usually short-lived and by the time you hear about something, the opportunity to make significant money has passed. Long-term investing is reliable and boring.
Asset Location: Pay attention to what type of account you are investing in. If the account is tax-advantaged (such as a retirement account), then you will not need to worry about capital gains or dividends in regard to taxes. If the account is taxable, you will want to choose tax-efficient exchange-traded funds (ETFs) instead of index funds. If you want to have bonds in your portfolio, put them in your traditional tax-advantaged accounts instead of your Roth accounts as you want to focus on maximizing growth in those accounts.
The Market Might Crash
You worry that the market will crash and you'll lose all your money. I'll let you in on a secret: The market will crash. It has before and it will in the future. It may crash right after you add your investments, and it may crash right as you are about to retire. The important thing is to understand when a crash could actually impact you and adjust your investments appropriately.
Know your risk tolerance and timeline: If you know you have time for the market to recover before you need your money and you know that you have a high risk tolerance, a crash should not concern you if you are appropriately diversified. If you don't have a lot of time for the market to recover before you need the money or you don't have a high risk tolerance and might panic sell during a crash, then you need to choose less risky investments or have a cash reserve to draw on during the crash. Familiarize yourself with sequence of returns risk and plan accordingly.
Don't Time The Market: Avoid trying to predict market movements. Instead, focus on a long-term investment strategy. Dollar-cost average to even out the dips and peaks in prices. Focus on rebalancing your portfolio, which forces you to buy low and sell high, rather than chasing returns.
I Don't Have Enough Money To Invest
You worry that you don't have enough to start investing. The good news is you don't need to have a lot of money to get started investing. Make sure you have an emergency fund with 3-6 months of expenses in place before you start investing. If your employer offers a match, try to contribute enough to get the full match. Starting small can still make a big difference:
Consistency: A small amount each week or month can make a big difference over time due to compounding. Contribute as much as you can as early as you can. You'll be amazed how much of a difference it makes down the road.
Minimums: Most accounts require very little to get started. If a mutual fund has a minimum that is more than you have, look at the ETF equivalent. Most ETFs do not have a minimum investment amount. You only need the amount to purchase a single share. If your brokerage allows it, you may even be able to purchase fractional shares of an ETF. You can check out our blog post comparing Vanguard, Fidelity, and Schwab to see which brokerages allow fractional ETF shares.
I Might Get Scammed
Whenever money is involved, the opportunity to become a victim of a scam or fraud is a concern. If something sounds too good to be true, definitely question it. If you don't understand an investment, do not invest in it until you do. Here are some guidelines to avoid bad investment decisions:
Financial Advisors: When choosing a financial advisor or planner, opt for a fee-only advisor. A fee-based or "free" financial advisor is often paid based on commissions from products or investments they recommend. This can create a conflict of interest around the products they recommend. If you are paying a flat fee or hourly fee, then you know exactly how your planner is paid. You can be more confident that they are recommending something in your best interest.
Verify Information: Always verify the legitimacy of investment opportunities or advisors. Check for licenses and do your due diligence before investing. You can use the SEC's Investment Advisor Public Disclosure website or FINRA's BrokerCheck to verify and search for disclosures from investment advisors and firms.
Reputable Platforms: Choose well-established, reputable brokerage firms and investment platforms to minimize the risk of fraud. Fidelity, Vanguard, and Schwab are three well-known and trusted brokerage firms.
Investing Stresses Me Out
The thought of market volatility and losing money stresses you out. Emotions should not be overlooked as a concern that keeps you from investing. Emotional decision-making has sabotaged many investment portfolios. Stress or fear can drive you to panic and sell during a crash. Greed or excitement can keep you from selling investments that are performing well that may be too risky or may just make up too much of your portfolio. That is why it is important to put systems in place to keep your emotions from triggering bad decisions. Let's look at some ways to minimize emotional influences on investing:
Behavioral Finance: There is an entire field called behavioral finance dedicated to studying how emotions and psychology influence investment decisions. Educating yourself about common behavioral biases like fear, greed, and overconfidence can help you make more rational choices.
Have a Plan: Develop a well-defined investment plan with clear objectives and risk tolerance. Stick to this plan, even when emotions run high. Determine when you will rebalance in advance. It is once a year? Twice a year? Every quarter? When your investments are deviate from your plan by 10%? When will you start adding bonds to your portfolio? Create a personal investment policy statement to clarify your rules for buying and selling investments. When your feelings start to overwhelm you, pull out this document to remind yourself of the plan.
Automate Investments: Set up automatic contributions to your investment accounts, which can help you avoid impulsive decisions. Dollar-cost averaging your contributions into the market helps you ignore the market volatility. Instead of wondering if now is a good time to invest, you just know that every paycheck means it's time to contribute. Better yet, make it automatic so you don't even have a chance to question it. Using a robo-advisor or target date fund will make rebalancing automatic as well.
I Don't Have Time To Manage Investments
You know that it takes time to really research companies to determine if they are a good investment, and you don't feel like you have enough time to research companies. There are literally people who do this for a full-time job, and they don't even get it right all the time. Here are some ways to simplify managing a portfolio:
Passive Investing: Consider passive investment strategies like index funds or exchange-traded funds (ETFs), which require less active management. This will allow you to easily create a diversified portfolio with minimal fees. Over long periods of time, these investments do just as well as actively managed funds.
Robo-Advisors and Target Date Funds: Robo-advisors can create and manage a diversified portfolio for you. The fee will be higher than managing the portfolio yourself, but cheaper than using an investment advisor. However, you need to do your due diligence and take a little bit of time to make sure you are okay with the investment portfolio that is being recommended.
Target date funds are similar in that they automatically adjust to a more conservative portfolio as you near the chosen retirement date. Again, take a look at the portfolio investments and glide path to make sure you are comfortable with the plan. One criticism of target date funds is that they become too conservative too quickly.
I Might Make A Costly Tax Mistake
The complexities of investment regulations and tax implications can be intimidating. You worry about making a mistake that could lead to legal or tax issues. Here are some ways to avoid tax mistakes:
Consult a Tax Advisor: The safest and most accurate way to prevent a mistake is to meet with a tax professional before making any major investment decisions. They can inform you of the tax implications of your investments and ensure compliance with tax laws.
Stay Informed: Keep up to date with investment regulations and tax changes by following reputable financial news sources and government websites. Many financial websites and podcasts will have an article or episode with recent significant legal and tax changes.
Tax-Efficient Investing: Learn about tax-efficient investing strategies, such as tax-advantaged accounts like IRAs and 401(k)s. Take some time to familiarize yourself with how and when the money in these accounts is taxed. In a taxable brokerage account, consider holding investments for at least a year to take advantage of lower long-term capital gains tax rates, which are often lower than short-term rates. Exchange Traded Funds (ETFs) are more tax-efficient and should be considered over mutual funds in taxable accounts.
Again, if you are considering more advanced tax strategies such as backdoor Roth contributions, Roth conversion ladders, and retirement tax planning, you will likely benefit by meeting with a financial planner and tax professional to fully appreciate the tax implications of these moves. They can help you avoid situations where you will have to use a pro-rata calculation or get a penalty because you weren't aware of one of the 5-year rules for Roth IRAs.
Emergency Fund: If you make a mistake, learn from it so you don't repeat the mistake. Having an adequate emergency fund should help you in the event that you make a mistake. If the tax consequences of investing are a mental roadblock you cannot overcome, start with a small amount of money. Any mistakes will be small and you will have the opportunity to familiarize yourself with the process. If you make a mistake that you cannot afford, do not ignore your tax liability. While a mistake this large would be rare, the IRS does offer payment plans.
Confronting Concerns That Keep You From Investing
Your concerns are not unreasonable. Investing can be risky and you can lose money. Acknowledging and addressing these concerns will actually make you a better investor. Being a thoughtful investor will help you reduce risk and carefully consider the advice you are given. So celebrate your concerns, but make sure that they don't keep you from participating in the stock market and cause you to miss out on one of the best ways to grow your wealth and beat inflation. Your future self will thank you.
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