Investing Fear Factors

Fear Factors and Fear Busters

Yesterday I wrote about how investing fear factors prevent a number of people from investing or investing as much money as they should. Whenever I see that clients have an inordinate amount of cash, I immediately start to assess what is causing this behavior, and I try to help them through it. From what I have seen in my practice, there are many fear factors that lead to asset allocation mismatches. Here are a few fears that my clients have shared and some of the ways I help them overcome those fears.

Fear Factor – "I will lose all of my money."

After “losing” half of what you had invested in 2008 and 2009, it is understandable to think that you could lose your wealth through investing. Of all of the fears, I think this is probably the most rational one as we have a recent market experience to confirm this.

Fear Buster – Understanding the difference between unrealized and realized losses

When you log into your investment account on any given day, you will see that your portfolio is either “up” (green) or “down” (red). What you are looking at are your unrealized losses or gains. I have many clients who look at this and think they have lost money if their account is in the red. The unrealized losses are just a snapshot and an indication of what your account would look like should you sell. You only “lose” money when you sell what you own at those prices. If you choose to sell, then it becomes a “realized” loss, until then, it is as though it has not yet happened. If you purchased shares of a company, or an ETF or a mutual fund, you still own the same amount of shares that you purchased on the day you purchased them. No one took that away from you.For my clients, when we look at investing money, we are looking at money that is not ear marked for anything for greater than a year. Given this time horizon, they should not be looking at the account on a daily basis, rather every few months. My clients who look at their portfolios regularly give themselves whiplash from the red and green fluctuations. But they know that when they see red, they should take a deep breath and remember that they don’t need the money today and they are able to move on with less stress.

Fear Factor – "I don’t have the money to invest."

Even my clients who have a bunch of cash in their checking and savings accounts tell me they don’t have money to invest. This is because they like the “safety” of having cash on hand. Or for those who don’t think that they have any money, they don't realize that you can open brokerage or retirement accounts for as little as $1,000.

Fear Buster – Money classification

One of the first things that I help clients understand is that their assets should not be viewed as one bucket of money but rather three. The first is their emergency money or funds they may need in the next 6-8 months. On the complete opposite end is their retirement savings, and in the middle is what I call the “life” bucket because this is the money they will use to fund most of what they want out of life after basic necessities but before retirement. The emergency bucket should be kept in cash, but everything after that should be invested with varying levels of “risk.”When I talk to clients about investing, I am not talking about investing their food or rent money. I am talking about “longer term” money that should be working harder for them. Many of my clients think that they need more money in the emergency bucket; however, if you are investing in widely traded investments like stocks, bonds, ETFs and mutual funds, you have the ability to sell these and get cash within a few days. I have some clients who even invest a portion of their “emergency” bucket because they know that their investments aren’t locked up in something that would take them months to access. Identifying your three buckets of money really gives better clarity to how much money you have to invest and how you should invest it.

Fear Factor – "The stock market is not safe."

Most of my clients who would say this would probably point to an image* like this one below as their “evidence” to support their case. (I added their emotions during this time period to the graph.)

Fear Buster – Understand risks and take safety precautions

I think the image above is the absolute perfect one to describe investing. When you invest, the experience is definitely akin to a rollercoaster ride, there are always risks and always ups and downs. I am sure that the 15% plunge in 19 days in 2012 would give even someone with the strongest stomach reason to feel ill. As someone who hates roller coasters, I can absolutely understand this feeling of dread, and the cure for this fear is similar to what I do when I go on roller coasters, I make sure I understand what I am getting on. I think a problem people have when they are investing is that they don’t think about it as a roller coaster ride, they think it should be more like a bike ride. And when they experience uncomfortable bumps, they want to jump off. I make sure that my clients understand the roller coaster and know that there will be bumps along the way, but jumping off, just as it would be a bad move in the amusement park is a bad move where investing in concerned. That 15% plunge in 2012 was painful, but six months later, the market “recovered” and you were thankful you didn’t jump.

Just like there are safety precautions in amusement parks, you need to take safety precautions when you get on the investment roller coaster.

Don’t put all your eggs in one basket – i.e. make sure you are diversified. You will have a much more wild ride if you just invest in Apple vs. an ETF of tech companies or better yet a broad market ETF.
Make sure you are only investing money that you won’t need in the immediate future.
Invest in multiple assets not just stocks (i.e. stocks, bonds, real estate, etc.) this diverse asset allocation will smooth out some of those bumps on the ride.

Fear Factor – "I don’t understand the markets."

I understand this fear more than any other, as it was my biggest fear factor. As I mentioned yesterday, it was so big, that I decided to make a career change in part because of it. I can assure you, though; you do not need to make a career in the financial services sector to understand the markets.

Fear Buster – Discover amazing tools and resources

Twenty years ago, most people utilized a financial advisor because it was very difficult to get information on investments. Today we have almost the reverse problem where we have so much information available that it is difficult to process. I am going to share with you some resources that I find helpful; however, I think it is important to find someone or something that makes sense to you and stick with it. Here are some investment resources that I would suggest.

Financial Service Providers – If you are going to invest your money with them, you may as well take advantage of the resources they provide to you. E*Trade (affiliate link) is an example of a great resource. First of all, I love the fact that their motto is “Learn How to Invest with Confidence.” Like other similar sites, you can trade and do your own research; however, they have advisors available via phone to talk to you about your financial choices. If you think you want to invest in ETFs, but don't know which one, pick up the phone and ask. You should not have to sit at your computer for hours trying to figure it out by yourself. They also have an area specifically dedicated to education and helping you make informed decisions. Most providers that you would consider for self-investing (i.e. Vanguard, USAA, Fidelity, Scottrade) will have similar resources at no cost to you (other than having your account and assets with them) and you should take advantage of them.
Bloggers – There are so many amazing resources provided by the personal finance blogging space. What I love about PF bloggers is that they take the time and energy to explain seemingly complex situations by breaking them down so we can all understand them better. I have something fun planned in the future to help with investments. Until then, here are some blogs that I love for great investing info/advice.
General Financial Websites – If you are still looking for some other great resources to get comfortable with investing, here are some general sites that I think have a wealth of information that is easy to understand.

Yesterday I shared the reactions of clients when I first tell them we are going to invest more of their money. Here are the reactions of clients after they have overcome their fears and invested more.