Is Fear Keeping You Out Of The Stock Market?
The biggest concern for many investors is the fear of losing their money. The stock markets have shown some volatility the last week or so, and the recent screaming headlines in the financial media do nothing but encourage panic.
Some people think the latest bull market has overvalued stocks and a major market meltdown is imminent. They are sitting on their cash and waiting for the right entry point.
According to a BlackRock survey, 70% of adults aged 25 to 36 are also clinging to cash assets. Apparently, these Millennials don’t have much trust in the stock market and are afraid of another large market crash. This puts them at risk of not having enough saved to enjoy a comfortable retirement.
It’s true. Investing in equities does carry risks. Market corrections (drop of about 10%) are common. Bear markets (drop of 20% or more) will likely occur during an investor’s lifetime.
Even a reasonably diversified portfolio of stocks lost about half of its value during the 2008-2009 market crash. However, avoiding equities completely isn’t the best strategy. The stock market can be good to investors who have the discipline.
What can you do to get over your stock market fears?
1.) Educate yourself
Combat your fears with knowledge. Learn the basics – how the markets work so you can prepare yourself for future market conditions. The more you know, the less afraid you become, but avoid information overload.
Stop reading the gloom and doom reports in the financial media. Your financial education should not come from the news media. They need something to report and tend to sensationalize short-term market events to grab our attention. Just because something appears in print doesn’t guarantee that the information is correct. Look for reliable sources.
Investing magazines and books can provide useful information.
Knowledge is freely available on the Internet. Basic investing information is available at sites like Get Smarter About Money and Canadian Securities Administrators. Some social media sites, forums and financial blogs are worthwhile if written by knowledgeable authors.
Lack of confidence and second guessing yourself can paralyze your decision making. If you’re afraid of picking the wrong investments, turn to a professional for help. You could also try one of the many well-publicized model portfolios that have yielded good returns.
2.) Take a long-term investing approach
The biggest fear of investing is losing a lot of money in a short period of time.
Investing is a long-term process and is most likely your only way to reach your long-term financial goals.
Consider the benefit of investing sooner rather than later. Time is on your side.
Don’t keep monitoring your portfolio. This is psychologically hard, but don’t let short term losses bother you too much. No one likes losing money, but it will be temporary. You’re not going to need this money to survive tomorrow, or next month, will you?
Acknowledge short-term market risks, but trust in long-term historical gains and commit to long-term investments.
Even if you are in, or close to, retirement you probably still have a long horizon of a decade or more. You still need to invest a portion of your portfolio in the stock market to get better long-term performance and beat the effects of ongoing inflation to keep your purchasing power.
3.) Determine how much risk you need to take to reach your financial goals
You can’t control stock market performance, but you can control how much risk you are willing to take.
Just because everyone you know is all gung-ho about how much money they’ve made in the stock market doesn’t mean you have to jump on the wagon and take on a lot of risk if you don’t need to. You may be able to reach your goals with more modest returns in a portfolio of mostly GICs and other fixed income, with a smaller portion in equities for growth.
If you determine you’ll need a larger return of 5% or more and you’re still not comfortable accepting the risk that comes with it, the only solution is either to save a lot more or scale back your goals. It’s not worth losing sleep over it.
4.) Be cautious about investments targeted to the risk-averse
Market volatility always increases interest in investment products that come with a principal guarantee. These investments include market-linked GICs and Principal Protected Notes (PPN). They promise the chance to capture the upside of a rising stock market without the risk of losing your principal if the market drops instead.
Don’t get caught up in a compelling sales pitch. These products are complicated and guarantees come with a steep cost.
Final thoughts
The future is always uncertain. But, if you wait on the sidelines hoping for the “right time” you’ll never get your investing started. Making the leap into the stock market can be scary. But, “It’s scary” is not a good excuse.
If you want to be a successful investor and reach your goals, let go of events you can’t control and devote your time and energy to the things you can. How much you save and invest each year will have a greater impact on your retirement lifestyle than anything reported in today’s news.
Making regular investments in a diversified portfolio is always the thing to do.
Over time, the benefits will be obvious.
My main thing in investing is telling myself I will be a better investor than my mother. She invested in a couple of mining stocks in the 70’s and 80’s that both shut down so she lost her money. I was surprised to find the stock certificates in my father’s safety deposit box. I can see she bought 500 shares of a couple of stocks, but not sure how much she paid for them.
As for monitoring the portfolio, how much or often is too much? I rarely pay attention to my mutual funds other than a couple of statements a year. As for my investments in Questrade I notice them more often. This might be because I’m going in to buy something, so I can hardly miss my home account page that has the current value of my stock portfolio. Same when I go to the trade area I can see the current quote on each stock. I log in just after mid-month when the previous month’s statement is posted. Two reasons. I transfer out my dividends and I track on a spreadsheet the current value of each stock plus I track each dividend.
This is time consuming, takes an hour. And was kind of depressing last weekend! Now I’m really wondering if I should track the current values monthly. I still want to keep my dividends up to date each month, but I don’t know if I need to keep bothering with the current values.
Am I being too obsessive with my monitoring? It’s not like I check my stocks hourly, daily or even weekly. Especially not recently! I do get email alerts from Questrade when one of my stocks has above volume trading activity and I get the current quote, but that’s about it.
Ah yes, Cheryl! Those penny mining stocks. It brings back memories.
It’s common for new investors to monitor their balances too often. They don’t advise “Set it and forget it” for nothing. That being said it’s hard to miss when you are making new contributions.
I input my dividends on a spreadsheet at the end of each month and I have another spreadsheet for individual balances that I input annually and it tracks several years. That way I can see – over the long run- how the investments are stacking up and whether I would have to sell if they are not performing. I really don’t think it’s advisable to track balances monthly. That’s too short of a time span and can show too much volatility even in a relatively stable market. And I would stop those Questrade alerts.
I have to admit I did take a peak at my portfolio last week, but I’ve been investing so long that I don’t really notice any changes at first glance. I’m always still ahead. That’s why investing is a long-term proposition. You tend to get over your fears over time.
I’m not so sure they were penny mining stocks as much as a family friend was either a part owner or partner or maybe just a heavy investor and enticed my mother to buy. But they could have been penny stocks!
I’m a buy and hold investor. Looking for dividends and growth. I’m thinking I’ll just track my investments when my mutual funds statements show up a couple of times a year. I can still see what the amounts are when I glance through my monthly statement to get to my dividends, and those I’ll keep track of each month.
I’m not sure how I turned on those Questrade alerts, let alone how I’ll shut them off! They’ve come in handy a couple of times when I’ve noticed a stock suddenly jump up several dollars and then I’ll look for a news release to try to figure out why. Usually it’s meant a stock I hold is being bought out by another one.
The hype, doom and gloom promoted by the financial press is not good for individual investors and it’s in most people’s interest to either ignore or take most financial headlines with a pinch of salt. Like Nassim Taleb noted in his book “Fooled by Randomness,” financial markets journalist find a reason for every move by the market: it’s either because of this or that, when most times, the market is just exhibiting its own natural behaviour – randomness.
I gave up tracking my portfolio and net worth monthly. It’s a lot of work, and is mainly tracking the market. If/when I sell, the value will be what it is. I do track the adjusted cost base when necessary, and the dividends paid; these go into an investment savings account which pays a bit more than the regular cash account. I plan on letting them sit, transfer extra money when I can, then buy some more stocks. Note: I do not hold very many stocks (about 700 shares in total of some solid companies) as I got into the game late. I refuse to look at penny stocks, which my husband loves; he is now down about $32,000. Good thing it was mostly his money.