This is the third of a multi-part series on how to invest outside of a 401K. The whole idea for this series started when I was asking a group of about 30 co-workers if they invested outside of a 401K, and found out that ZERO of them did.
I later polled readers as to why they had not started investing outside of a 401k. And now we’re hitting each of the reasons why. The first part in the series dealt with the question of whether you should pay off debt or invest. The second on how to start an online broker account like Ally Invest.
In this third part, we’ll discuss getting over the fear of investing. In that poll, 43 readers (20%) chose “I’m scared of losing money and prefer guaranteed returns” as their top reason for not investing in the market. We’ll discuss some of the risks involved in NOT getting over that fear and some of the alternatives to low-risk, low-return investing.
The Fear of Investing
I won’t skirt around it. Investing in the market is scary. Especially when you first start out. And super especially when you’ve lived through the dot.com bubble and the Great Recession and watched the market absolutely plummet.
Investing can be intimidating too. Who wants to spend hours upon hours looking at charts, reading analyst recommendations, and watching their investments go up one day and down the next two? That presents an accelerated path to the mental-ward.
Still, there’s one thing even scarier than investing in the market.
If you’re not investing because you’re scared, you’re probably doing one of the following with that discretionary income:
- Investing in a certificate of deposit (CD)
- Putting the money in a money market account (MMA)
- Leaving your money in a low or zero interest checking or saving account
- Putting your money under your mattress
- Spending it
What kind of return on investment will you get from each of these vehicles (at the moment)?
- CD: Ally Bank is offering up a two year ‘Raise your Rate’ CD with a return of 1.49% at the moment.
- MMA: The national average at the moment is 0.25%.
- Checking/Savings Account: Ally checking offers up a 0.5% interest. Capital One 360 offers variable rates on its Capital One 360 checking, all under 1%.
- Mattress: At best 0% return. In event of fire?
- Spending it: Unfortunately, I’ve found that if your money isn’t tied up in investments, that voice that whispers “spend it, you earned it” wins out in the end.
Don’t get me wrong, a CD or checking/savings account have their purpose. They are great for short-term funds that will be applied towards a big purchase or for an emergency fund.
But as an investment?
The Risk of Low-Risk, Low-Return Investing
There once was a time, not too long ago, that you could lock in a 5% return on a CD. And in the 80’s, you could frequently score a CD with over a 10% interest rate. Of course, mortgages had interest rates of 15%+ back then, but that’s another story.
CD’s have been around 1% for a few years now and checking and savings, much lower. Not to mention, you’ll have to pay taxes on the interest. Don’t trick yourself into thinking that either are “investments”.
You may lose money in the market – there is risk involved to putting your money into a stock, bond, or fund. But something else presents a more certain outcome…
If you don’t invest, you are GUARANTEED to lose money. We are entering a period of rising inflation due to our country’s debt and rising oil and gas prices (which raise the price of our clothes, food, fuel, and everything else).
In fact, inflation increased to an annual rate of 5.5% in February (9.6% using older measures of measuring). And its getting worse.
If you “invested” all of your savings in that 1.15% CD, the value of your money would actually decline by over 4% in a year using the new inflation measures or 8% using those old.
Accepting a guaranteed loss like that is not only risky, it’s a little bit crazy. While your peers who got over the fear of investing enjoyed 5%, 7%, or even 10%+ annualized returns over the years, you lost money.
In a time of high-return CD’s and no inflation, it might be another story. But this is the present situation.
If that’s not motivation to get over the fear of investing, then I don’t know what is.
Start Educating Yourself
Beyond motivation, the other component to getting over the fear of investing is comfort through knowledge.
If you don’t know anything about investing and don’t push yourself to learn anything – it’s scary – and you’d likely make some big mistakes.
I’ll continue to teach the basics, but you should also immerse yourself in the investing world beyond the scope of what you can get on a personal finance blog.
You need to develop an interest and base level of knowledge and comfort in investing and the best way to do that is to immerse yourself in it.
One step at a time…
Getting Over the Fear of Investing Discussion:
- Have you left your money in any of the low-risk methods I highlighted? Why?
- What is your favorite investing magazine, paper, book, or website?
- What has helped you get over your fear of investing?