How To Get Over Beginner Investor Fears

Don’t be intimidated by investing. Learn how becoming an investor can be a rewarding and money-saving experience.

A Beginning Investor Story

Investing on your own can seem scary.

The world of finance appears to be, at least in the beginning, a complex maze of numbers and movements, leaving new investors wary of going at it alone.

I used to think of the finance world as a bunch of slick-haired Pat Riley types yelling ‘buy’ and ‘sell’ across a crowded room.

Even a stock ticker bar has confusing hints of the matrix if you don’t know what you want.

The good news is becoming an investor isn’t half as scary as it seems with a bit of education and a splash of spunk.

Investing alone can save you much money over your lifetime without adding additional risk.

In a post-pension world, nothing more worthy of your time may be.

So in this two-part series, we will cover what investors need to know before they start, the three most essential investment statistics and three critical pitfalls to avoid, but first, a quick story.

Junior Investor

When I began investing independently, I was only 13 and had yet to develop that sense of rational fear that pulls us through most of our adult lives. 

Coming from a family where financial education was highly valued, I learned to save as much money as possible early.

Once I hit adolescence, that cash pool had grown sizable enough that there were alternative options to my Junior Savings Account, which yielded a sub-inflation rate of about 0.9%.

At first, the options seemed overwhelming; after all, there were bonds, stocks, mutual funds, money market savings accounts, and my twin-size mattress.

Being the stand-up folks they were, my parents encouraged me to join other investors in buying shares in a group of socially conscious funds.

These were mutual funds – or groups of stocks – that invested purely in companies involved in ethical businesses.

Overall, I had some solid short-term success, enjoying the monthly statements with giddiness generally reserved for Christmas.

Then something happened… a recession.

After years of diligently investing my hard-earned money, I suddenly found myself with less than what I had at the start!

Learning About Investor Risk

This was a pivotal moment in my financial education, and even though it hurt at the time, I am better off because of it.

That one downturn, coupled with the subsequent rebound, taught me three essential things about investing:

1. It is very possible to lose money investing.
2. If you can ride out periods of losses, you will experience even more over the long term.
3. You have to know your risk tolerance.

Before that event, the stock market and investing seemed uncomplicated to me.

Investors pick some fun things to invest in and buy shares, and as those companies earn more money, they pay me over time. 

Piece of cake, right?

I learned that one downturn can clear you out if you are not wise and do not invest over an appropriate time frame.

Having the ability to invest over a longer time frame, where I did not immediately need to remove my money from the investments, meant that I could ride out the recession and enjoy the long-term success trends that investment markets offer.

The difference between short-term and long-term investing is one of the most critical aspects for individual investors.

Another critical principle is knowing and understanding your risk tolerance.

1. What Good Investors Know – Risk Tolerance

Risk tolerance has two main components; at its core, it deals with the amount of financial risk you can handle.

I, however, take it a step further and add a second component: the amount of emotional stress you can handle.

Your financial risk tolerance deals with how long you can wait if things get dicey. 

For example, if you know that your car is on its last leg and you have very little money available to purchase a new one, that is not a good time to lock up all your savings in investments.

The general rule is never to invest any money you reasonably need in the next five years.

That period would allow you to ride out a downturn based on historical averages.

Remember that this concept means revisiting your investments each year and may require you to withdraw some money to keep yourself appropriately liquid.

The emotional stress component of risk tolerance might be even more critical if you decide to invest independently.

When I began investing young, the emotional risk didn’t matter much.

I knew my parents would care for me even if I lost all my savings through investments.

However, even though there shouldn’t have been much stress involved, I was deeply upset by any setbacks.

It turns out that I am a bit anxious, and the idea that I would lose something I worked so hard to gain bothered me.

This is when I realized that my emotional or stress tolerance was not as high as I had anticipated.

In itself, there is nothing wrong with that.

Invest The Way You Want

You should never be proud or ashamed of your risk tolerance; it is what it is, but it is good to know what it is when investing.

Individual investors are the ones who have to be comfortable with where their money is, and as an investor, you are the one who has to sleep soundly at night.

It is a personal decision and is another reason investing on your own makes sense.

If you aren’t comfortable with the amount of risk you are taking, then you are more likely to react too strongly when things change.

Keeping a level head by owning suitable investments – and, more importantly, being actively involved and knowing what they are – is a massive advantage over the long term.

I have personally talked to far too many people who don’t even know what the bulk of their retirement savings is.

In my book, that is a scary prospect.

2. What Good Investors Know – Ignoring the Herd

While adapting your investments to align with your risk tolerance is a huge benefit of becoming your financial advisor, it isn’t the only advantage. 

You also are not a member of the Wall Street crowd, which means you are less likely to fall into the short-term herd mentality trap.

Investors typically see more success through less action, and brokers often see moving cash around to different investments as a way to prove their worth.

Those two positions oppose each other, which makes many folks in the finance industry question the proper function of advisors.

Individual investors will also be able to react quickly when their lives change.

Maybe you lose a job or find out there will be a new addition to your family.

Not having to go through a third party to realign your investments can save time and a lot of money, depending on how their commissions are structured.

That gets us to the most crucial reason you should consider investing for yourself: expenses. 

3. What Good Investors Know – Expenses Destroy Wealth

The financial advisor industry is littered with hidden expenses and fees.

If you have ever sat down with a financial advisor, you were most likely recommended a list of funds to invest in.

You might not know what fees you are paying or already paid for these funds.

One example is the notorious 12b-1 fee.

Many ‘investor recommended’ funds hocked by advisors contain 12b-1 fees.

This is a fee you pay for the ‘marketing’ of the fund.

In other words, you are paying the advisor, through fund kickbacks, for the privilege of them telling you to invest in it. 

Just so we are clear, that adds no value to a fund.

Those fees can even cost up to 1% of your total investment!

One percent might not sound like much, but if the market only returns a historical average of 7% a year, you will automatically lose 15% of your potential gains in year one!

If that sounds confusing, don’t worry.

All these fees are included in a funds’ expenses, so they show up in the expense ratio, which will be covered in part 2 next week.

If you do nothing else due to this article, at least reach out to your advisor or even look at your investments and try to get a handle on what expenses you are paying so they can be minimized.

Management Fees Charged By An Investor

For example, ask about marketing fees like the 12b-1, trade commissions, and annual management fees your advisor charges.

Eliminating these by becoming your advisor can have tremendous benefits over the long term.

Plus, if you invest for yourself, follow a few basic principles, and invest for the long term, you will succeed by default.

Not to mention that you are the only person who truly has your best interests at heart.

Great, so you might be willing to give it a shot and join the hoards of investors already managing their assets.

What are your investment options, and where should you invest?

Money Market Funds

Money market funds are the checking accounts of the investing world.

These funds are meant to be very liquid, meaning you can quickly access your cash.

Plus, money market funds are very stable.

The flip side of that stability is that they offer investors relatively consistent but lower interest payments.

Money market funds invest in short-term securities and high-quality debt, making them the ideal place for cash that you might need shortly and are unwilling to tie up for the long term.

As an investor, I use money market funds to hold cash I have set aside for the following years’ retirement contributions.

This way, the funds are ready to invest, but because I still have quick access to them, they also make up a part of my emergency fund for the current year.

Bonds

Think of bonds as loans you make to companies.

You will often hear them called fixed instrument securities, which are agreed-upon loans that the companies themselves have structured.

By purchasing bonds, individually or as part of a mutual fund, you have agreed to the company’s terms and are loaning them your money.

You now have a contract with the company to be repaid over a specific period.

There are several types of bonds, and every company gets its risk rating.

The higher that risk rating, the more they will have to pay the investor to borrow the funds.

That might sound simple, but that additional cash also comes with the risk that they might go belly-up and pay you nothing at all.

It is a delicate balance, so many investors use mutual funds for their bond exposure.

Those funds will diversify the individual bond risk at a far lower cost for individual investors.

Stocks

Also called a security or equity, a stock share represents company ownership.

In essence, when investors buy a share of stock, they now have a contractual right to share in the company’s earnings.

Common stock, typical for most regular investors, even comes with voting rights.

This means that as an investor, you would have a vote at the shareholder meeting in proportion to your level of ownership in the company.

Don’t worry, though. Most regular folks vote by proxy, meaning you don’t have to fly out to a meeting.

Of course, you also have the option of not voting at all.

Another feature of common stock is the ability to collect dividends.

These are portions of the company’s earnings paid directly to the investor, typically every quarter.

Earning Dividends

Dividends are a fantastic way to grow wealth over time and indicate strong company performance because they represent sustained earnings.

Stocks also rise and fall in share price based on predictions about future earnings.

If you were to purchase a stock for $20/share and the outlook for the company improved, its price would likely rise to something like $22/share, and were you to sell the stock, you would have netted yourself a $2/share ‘capital gain.’

In short, you would have made money in addition to the dividends (earnings sharing) you received.

Of course, that also works in the other direction!

Mutual Funds

These funds are pools of money that individual investors like you or me can buy into.

With that pool of money, a fund manager will go into the financial markets and invest in stocks, bonds, & money market instruments on the investors’ behalf.

The significant benefit of mutual funds is the ability to diversify your investments at a low cost.

These funds will be invested across many companies, meaning that you are spreading your risk (diversifying) and not keeping all your eggs in one basket.

The scale they operate on allows funds to do this more cheaply than you or I could.

Each fund will have a different objective, so there is still research.

Before buying into any mutual fund, you should read through the prospectus, which gives an overview of what returns the fund hopes to accomplish, what it invests in, and several basic metrics and ratios, like the fund’s expenses.

This makes mutual funds fantastic for new investors, but watch out for the expense ratio! There will be more to come in the next post.

ETFs

An ETF, or exchange-traded fund, is similar to a mutual fund but offers far lower expenses.

That means you can keep more of the returns from each investment in the ETF.

It offers lower expenses by adopting a passive strategy without an active fund manager always buying and selling investments.

ETFs will track indexes like the ones you hear about on the news – FTSE, S&P500, Dow, etc.

As a result, by investing in ETFs, an investor can gain access to an entire range of stocks or bonds with one ETF share purchase.

These ETFs trade on exchanges, hence the name, so you will pay a standard brokerage fee to buy and sell.

Where Investors Put Their Money

Note: If you are paying over $7 for a trade, no matter how many shares you purchase, you should consider switching your investments to a low-cost investment house like Questrade.

So there you have it. There are several reasons you should consider investing on your own and the primary investment options to choose from. 

To get started, search Questrade’s website to familiarize yourself with the options available in the categories we just looked at.

They offer low fees and transparent pricing, so you keep more money.

Questrade has excellent tools to analyze different funds and stocks; if you open an account, you can chat with someone to answer some basic questions.

The company has several sites specifically tailored to your country, so be sure you are in the right section.

Questrad also offers some of the best, low-cost investment options and is known to be an industry leader.

I have used Questrade for years and could not be more pleased with the results.

Build your investment portfolio with a self-directed account and save on fees.

Make your money work harder.

Discussion: Are you ready to become your financial advisor?

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