I want to start investing, but I’m scared of the market

Have you ever thought to yourself “I want to start investing, but I’m scared to risk my money”? You’re not alone.

Before I started to invest, I was actually quite fearful of the stock market. The thought that a crash could wipe out all of my money scared me – especially post-2008 housing crisis. But while I was in college, I joined an investment team and started to learn more about individual stocks and how the market operates.

With stocks, there are many investment strategies – leveraging technical analysis, investing into high growth stocks, options, futures, etc.

All of these terms confused me but over time I experimented and tested out these different areas and decided that long-term growth stocks with some risky assets was the route to go. Options, futures, etc were too confusing and I lost too much money in them – so my risk tolerance was much lower than those who live in this world.

Although I’m not a financial advisor, the “buy and hold” strategy is generally what I recommend when people ask me how to invest and what strategies to consider. Once you get more comfortable with this aspect, you can start experimenting with other strategies and investing in other assets.

Buy & Hold

Buy and hold just means that you buy a stock or asset and hold it for a long time.

The thought here is that most stocks will grow in the long-run, which in my experience has held true. Experts have done a ton of research and they claim that the market grows at an average of 10% per year (or 6-7% when adjusted for inflation).

What does this mean? It means that if you were to leave your money in your bank vs invest into the stock market, you would be losing out on money. A high-yield savings account averages 3-4% and traditional savings accounts yield <1%!

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Mental Shift

I think the mental barrier here is that when you invest into stocks, you see your money go up and down, so naturally, you think you’re losing money. But the goal here is to change that way of thinking.

We need to train ourselves to think that we will only lose money if you sell and remember that you’re holding for the long-term not the short term. So we need to plan for this.

Only invest the amount of money you can afford to lose and not use.

Not all stocks are created equal

Some stocks are riskier than others and it’s important to understand this.

If you were to compare two companies, lets say Google and a smaller XYZ company that was created 2 years ago – which company do you think has a more likelihood to still be around in 10 years?

If you said Google, that’s correct – more established companies are less risky and usually stick around in the long run. But i’m sure you’re asking why would anyone invest in XYZ company then? Since it’s a smaller company, it has more growth potential. XYZ company can triple in growth over the next 5 years, but it’ll be more difficult for Google to have that same growth.

So the question to ask yourself here is.. What is your risk tolerance?

If you have money to lose and if time is on your side, then you can pick more risky companies to invest in. However, if you’re less risk tolerant (meaning you’re less willing to see your money fluctuate), the definitely go the route of more established companies.

Alternatively, if you’re not interested in having to do research into what specific companies to invest in, the ETFs may be more for you – which is usually what most people invest in when they buy & hold.

A good rule of thumb is that the younger you are, the more risk tolerant you should be. Time is on your side, so you can afford to ride out drops in the stock and/or market.

ETFs vs Stocks

Stocks are shares of public companies at which you can purchase/invest in that represents partial ownership of the company. As the company grows, so does your stock but if the company struggles, then so do your shares.

ETFs are groups of shares bundled into one. So instead of buying one stock from a company (which is riskier) you can buy an ETF which is bundled together (which is less risky due to diversification of your hodings).

Here’s an analogy:

Imagine you’re in an orchard and you have $100. You can 1) purchase 1 entire tree to plant for that $100 or 2) you can purchase $5 of 20 different trees.

Let’s examine what happens if we fast forward 5 years from now. If you purchased 1 entire tree to plant yourself and that tree is now bearing fruit, you can happily take all of fruits from that tree. But on the flip side, if the tree was sick and couldn’t bear fruit, then you get nothing.

Let’s examine if you went the other route by purchasing pieces of multiple trees. In this case, you’d technically be getting less fruit per tree, but since you own pieces of multiple trees, you still have potential to enjoy fruits. If 5 of those trees get sick and never fruit, but the other 15 are healthy, you wouldn’t get any fruit from those 5 trees, and you’d still gain fruit from the other 15. So in this example, you protected yourself from risk.

In this case, if you purchase the 1 stock, you’re over allocated into 1 tree and all your fruits are in that one basket. But purchasing multiple pieces of trees, you fruits are in different baskets and you’re more like to profit (although usually not as much as if you went the 1 tree route)

What is Dollar Cost Averaging?

One question that pops up often is how much to invest and when to invest.

This is where dollar cost averaging comes in. This essentially means that on a recurring basis, you’re investing small amounts into the market – that way you’re not dropping hundreds or thousands of dollars all at once.

The goal is to get the average price that you’re purchasing a stock or ETF as low as possible.

Averaging into a stock or asset is a great tactic since usually, it’s a set it and forget it sort of deal.

We can get into more detail on how to set this up in a later post.

In Conclusion

It’s scary to start investing your money since seeing it fluctuate can cause alot of angst. However, there are long-term plays that are less risky that anyone can start to implement to address that risk.

Investments shouldn’t be scary and are generally safe in the long run. Diversify your portfolio and holdings so that you’re not over allocated into any one stock.