There’s an old joke about a man facing financial difficulties. He prayed every day with the hope of winning the lottery. After going several weeks without winning, God’s voice echoes down from the heavens, saying: “If you want to win the lottery, at least buy a ticket.”
With investing as with gambling, you can’t win if you don’t play. Simply shoving cash under the mattress may make you feel safe, but you’ll be robbed over time by inflation. The biggest mistake investors make is to give into their emotions far too easily.
Some get greedy and pay for large gains when they evaporate. Many, however, are paralyzed by fear, especially when they see big selloffs in the market.
Since the financial crisis in 2008, individual investors have shown more fear than greed. Funds have flowed out of stock investments and into high-priced and low-yielding bond funds instead. Such investors have lost on potential gains in the stock market, and are setting themselves up for tragedy when bond yields start to rise.
Overcoming fear isn’t easy, but it can be done. Courage, the opposite of fear, doesn’t mean the absence of fear. Rather, it means keeping calm and sticking to a plan.
The first step to overcoming investment fear is to have a plan, and follow through with it. Regular contributions, whether to a brokerage account or a 401(k) and IRA/Roth IRA are a good first step. When the market sells off, as it invariably will, a regular contribution will allow you to buy more at bargain prices.
A plan should also include a set price or percentage return at which to take profits or losses. By setting stop losses, you can get out of a losing trade before it falls further—even if your instinct is to “hold on” and wait for the stock to break even. The more a stock falls, the more it has to return though. A 50 percent loss needs to double in price for the investor to break-even!
(Bonus: Setting profit points also keeps a check on greed.)
The second step to overcoming fear is to not sweat the daily swings of the market. The most important aspect of investing is to be invested.
How can that be done in a way that keeps you from succumbing to fear?
Overhaul your portfolio to the point of comfort. That means selling volatile assets and buying more mundane assets.
Over time, the biggest driver of wealth will be the compounding effects of stable assets. Putting a large chunk of your wealth in boring, blue-chip companies and letting the dividends re-invest over a few decades will work to substantially grow your wealth.
Staying on the sidelines is a recipe for loss. So is waiting for a down position to “turn around” and become a gain.
As with the man playing the lottery, you’ve got invest to come out ahead.
Stick to a plan, and have the courage to face the fears the market throws your way.
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