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 investment account.
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 Great Recession and COVID shutdown and watched the markets 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: around 3-4% at the moment.
- MMA: about 1.5%.
- Checking/Savings Account: 0.2%
- 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 7% 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 rates have been rising due to inflationary pressures, but don’t trick yourself into thinking that CDs or savings/checking accounts are “investments”. At best, you’ll break even with inflation. Not to mention, you’ll have to pay taxes on the interest.
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 has been increasing. And it’s getting worse. If you “invested” all of your savings in a 2% rate CD, the value of your money would actually declined by over 5% in the last year.
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 CDs 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.
Subscribe to Kiplinger magazine for a year. Read books like Investing for Dummies, The Intelligent Investor, and The Bogleheads Guide to Investing.
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?
I think everyone initially thinks it is too difficult or scary to invest in the markets. In reality, it isn’t that difficult.
I got over my fear of the market by reading as much as I could. I had airline miles that were going to expire so I subscribed the WSJ. I bought the book The Neatest Little Guide to Stock Market Investing to learn more about the market. I signed up for a brokerage account with Vanguard since my 401k was with them and started reading the research reports.
The more I read, the more comfortable I became with investing outside of my 401k.
Subcribing to financial sites and publications is a good idea… so is educating yourself in everyway possible. However, dont lose sight of simple investing. Online brokerages are low cost and easy to setup, and you can open an IRA through one. Then you you can invest in a dividend paying mutual fund, or two of them for added diversification. You can automate monthly deposits to the account etc.
I contribute 10% of my salary to my 401k, this is still investing in the market, since the money is in publicly traded funds! People always fail to understand this.
I then take 10% of my after-tax income and invest in my online brokerage. I typically put money into ADP, JNJ, and VALIX… all pay dividends and are pretty safe investments with proven returns and increasing dividends.
Great article, and I would like to see more people with your school of thought. Inflation is a killer.
My problem is that I don’t really know where to look and what to look for to find good stocks. Is it as simple as picking a couple Morningstar 5 Star stocks? Do I invest in stocks or ETFs? What stocks and ETFs or mutual funds should be in a brokerage vs. a Roth IRA? I would like to retire early so is it wise to max out Roth and 401k contributions not leaving that much (2-3k?)in a brokerage account? (I’m 23 right now). What investment sites are the best to learn how to invest and find good stocks? This is the kind of stuff holding me back currently, along with a car that may break down at anytime which would need to be replaced.
If you are looking to retire early, then you might want to look into a ROTH IRA… this is after-tax money that you can remove 5 years after initially opening your IRA account. This way, if you open one up now, you can remove your funds at 28 penalty free, and the money has already been taxed. obviously 401k you would have to wait much later in life.
I tend to stay away from specific stock picks, in my opinion there are too many people out there telling you what is the next hot stock pick. I invest in VALIX, a dividend paying mutual fund. I think ADP and JNJ are great stocks because they have decades old history of increasing their dividends annually, and that is a built in rate of return.
I also do some lending club investing, or social lending. I have a review of this on my site as well, though it’s not very liquid and not for everyone, but I think its a good diversification.
You can withdraw your contribution to an IRA at any time. Earnings can be withdrawn penalty free after five years, but only if you are over 59.5 yrs. old. Ryan will have to wait another thirty six years.
Isn’t investing over a period of years (or even decades) the best way to see a return on something?
Its just about the only way to see a return…otherwise inflation eats your money up, its only a matter of time.
In order to gain true wealth in life, I believe that you have to take a lot of risks and you have to invest in something or someone to become rich.
I couldn’t agree more that about %90 of people don’t invest enough. Especially beyond their 401k through their company. Not to scare anyone away from using brokerage accounts but a good read is “A Random Walk Down Wall Street”…For long term investing go for mutual funds with low low expense ratios en lieu of individual stocks.