Many people do not feel comfortable getting started with investing. This article will show you how to beat doubts to start investing. You may not even have known you had these 6 doubts!
For those already comfortable, we have 7 steps to start investing article.
The quick summary of 6 doubts to start investing
There are many different reasons why someone isn't starting to invest. But if you have the possibility and still don't, then this page might help you understand why you have not:
- Availabity bias
- Herding
- Loss aversion
- Present bias
- Anchoring
- Home country bias
1. Availabity bias resulting in mental absense
The 2008 financial crisis. It did a huge number on investors worldwide. Many got stuck in the losses they realized in the aftermath of the stock market crash. The average loss was around 37%. In the period to follow, the market gained near 27%, yet investors saw a negative balance on their accounts and believed the market to be flat or negative.
This disconnect between reality and perception made many non-investors and investors alike miss out on investments as emotions ran high. If they remained rational and continued to trust in their strategy, they could have ended up making money during the recovery.
Keep cool & carry on – beat doubts to start investing
Hence, should a large event occur or a financial catastrophe, simply remember:
- Losses are not realized until you sell off your positions
- If you belief in your strategy, the same products you bought at fair value, are now at a discount. Why not buy more?
- The market might see unprecedented highs and lows, but the cycle always repeats.
- Should the market collapse to 0, then the entire system, even physicial cash, will most likely be worthless. Hence you have the same risk of not investing, but miss out on the possible upside.
2. Herding resulting in unjustified FOMO decisions
It is in human nature to follow one another. Yet in investing, it is oftentimes more beneficial to make your own plan. Consider the latest WallStreetBets movement which is built on power in numbers, no underlying rationale of why to invest in certain instruments.
Investors who decided to join this movement either got out on time with some profit based on luck or are holding on to instruments they bought at much higher prices and are unwilling to let go of their ideal & realize their losses.
say no to fomo – beat doubts to start investing
Naturally, we follow the crowd because we fear making mistakes or
missing opportunities. Yet as mentioned, always make & stick to your own plan. If you end up joining WSB, Crypto, another .com bubble or any other 'fad', just remember to minimize your exposure to about 3% to 7% of your total portfolio. This way, if the investment skyrockets by chance, it will significantly impact your life. If it goes down, which is more likely, you are not impacted significantly.
Loss aversion resulting in strong negative emotion
Several psychology research papers have shown that humans experience pain due to a loss, much more intense than the positive feeling after gain. This can lead to hoarding cash physically or on a bank account, instead of investing.
However, many do not realize the 'opportunity loss' you incur by not choosing to actively invest. Several 'hidden' impacts on your money every year are:
- Inflation (reducing your purchasing power, by prices going up)
- Negative interest (reducing your money, by being charged for saving)
- Market increase (not deciding to invest, whilst 7% average return is realized on S&P500 index)
change negative emotion – beat doubts to start investing
Beating our own emotions is easier said than done. However, when thinking about how to minimize loss, we should always ask instead, how do i maximize gain? Do not forget to factor in risk though! Yet this kind of change in mentality can already result in different actions.
Present bias resulting in quick gains
When we know we get 'take a win', why wouldn't we? After all, who is there to say tomorrow the same offer still stands. Yet investing only works effectively, over the long term.
When we focus on the now, we have to realize this comes at the expense of the future. Naturally, this is also true vice versa. Another survey showed rather concerning figures on how many people do not have a plan to reach their financial goals, or do not have any at all! Especially when you consider the retirement mechanism reaching its limits, this should be on peoples minds.
bECOME Future oriented – beat doubts to start investing
Beat a 'here and now' mindset when it comes to investing, by:
- Set your ultimate financial goal (regardless of it being early retirement, financial freedom or otherwise)
- Agreeing with yourself on the percentage of earned income, you commit to 'the future' a.k.a investing
- Promise yourself this money will be 'locked' for a period of 15, 20 or 30+ years, unless a serious occurance will prevent you from living at your current stadards.
- Set a frequent date at which you invest, review your positions and track your end goal.
- It also does not hurt to check out the how to start investing in 7 steps page for more!
Anchoring to a promise
Expectations on returns should be used as a benchmark. But never as a given, nor an absolute value without a relevant index. Consider this, some people expect a 7% to 8% return when investing, because that is the 'promised' return.
However, smart investors know this is benchmarked against the S&P500 index, which tends to reach that level, on average. Meaning, if one year investors reach their 7%, but the S&P500 index returned 15%, they should not be content. Vice versa on lower returns.
Staying grounded vs 'promises' – beat doubts to start investing
As hinted to, always benchmark your own expected & realized returns to an index or instrument that your investment strategy, and thus portfolio, is closest to. This way, you won't be left wondering if 5% is good. But rather if your 5% was on par with the market you aimed to equal/beat.
Home (country) bias
We tend to like what we know. Even more so, if we are (slightly) nationalistic. The same is true for investing. Although the US is a huge market & a leading one at that, US residents invest near 3/4 of their money in the US, whilst the rest of the world (ROW) is closer to 57%.
The problems with mostly investing locally are two-fold:
- A strong emotionsal attachmend might impact your judgement when it comes down to buy/sell behaviour or better investment alternatives.
- Investing your money focused in one market will leave you subject to much higher risks. Instead, it's much better to diversify and build a spread out portfolio.
All places like home – beat doubts to start investing
Treat investing like you are a nomad. Boundaryless and limitless other than your money and ethics. Where do you want to invest? Where do you get a good return? How can you spread your risk? Ask yourself these questions first, then decide on a fair percentage of the total portfolio, to use and support your own country.
Now go and beat doubts to start investing
InvestingGuides hopes this has been an eye-opening experience. You should have all the required understanding now of how your psychology might affect your investing decisions. Most importantly, how to beat doubts to start investing today! Read our 7 steps to start investing if you feel ready. If not, browse around and until next time.
Special thanks to franklintempleton.com, where much inspiration was found for this article.