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One of the topics I find fascinating (and important) to explore is the idea of overcoming fear or other emotion that prevents people from investing in the stock market. Though some cynically view investing as a system gamed against the average investor, I believe it can provide opportunity for regular people to build wealth, gain greater freedom over their lives by becoming less dependent on employment, and improve financial security.
Recently, I had the opportunity to speak with Carl Richards on the topic of overcoming the fear of investing. He is a certified financial planner, Bucks: Making the Most of Your Money columnist with The New York Times, and author of The One-Page Financial Plan: A Simple Way to Be Smart About Your Money.
Through his book and his writings, Carl seeks to simplify the financial planning process, making a plan doable and its implementation, attainable. He applies this approach to investing and inspired these four easy steps to overcoming fear of investing:
- Keep investing simple. Too many choices often overwhelm new investors, and paralyze them from making decisions. To streamline this process, Carl suggests a simple approach: Open an account with Vanguard, set up an automatic deposit, and buy index funds on a regular basis. Note that if you are buying mutual funds, you'll need to make an initial investment in one of the funds; then you can establish automatic investments to purchase additional shares. As I mentioned in my Vanguard Review, Target Retirement funds and the STAR fund are available for a low minimum of $1,000; most other funds have a minimum of $3,000.To purchase Vanguard ETFs, open a brokerage account, fund the account with $3,000, and then purchase commission-free Vanguard ETFs.
Note that the construction of your investment portfolio should be aligned with your unique goals, which Carl discusses in his book. However, Carl describes a default portfolio with a 60/40 split between stocks and bonds. Most brokerage and investment firms offer asset-allocation tools and even portfolio-building tools to guide you in making basic investment decisions.
- Embrace the idea that simple can be incredibly effective. We often reject the idea that a simple process is better than a more complex one. Then, before we even get started with a new venture, we believe that grasping complex concepts and applying such complexity to day-to-day activities is just too difficult. So instead of taking a simple action, such as opening an account and purchasing fund shares, we become exasperated and do nothing.But the simplest method (see #1) is often the best one. For example, not only can Vanguard's market-index funds give you broad exposure to the market and allow you to create a diversified portfolio, but you'll avoid paying sales commissions and enjoy some of the lowest operating expenses in the business.Carl's remarks reminded me that, as a runner who often places in community races at the age-group level, I have found myself explaining to people that training regularly and occasionally faster is the key to running faster in races. But others often seem to think that I am not telling the entire story. Surely, they reason, there is a sophisticated training regimen, along with a complicated nutritional plan (often involving supplements), which must be followed in order to improve and excel.
Well, truthfully, you can adopt training techniques of elite athletes (or investors). But unless you've progressed fairly significantly (perhaps you are an contender for a spot on an Olympics team or, more realistically, you have accumulated $250,000 or more through personal investing), more advanced ideas may confuse you more than they may help you.
Similarly, Carl quotes John Bogle, founder of the Vanguard Group, in regard to building an investment plan with market-index funds: “There might be advice that's better than this, but the amount of advice that's worse is infinite.”
- Understand the difference between investing and speculation.Many people avoid the stock market after “investing” and losing a load of money (or knowing someone who made this mistake, such as a parent, friend, or boss). But Carl mentions that many of these folks did not invest but rather speculated on a hot stock or sector.He points to himself as an example of speculating when he purchased $10,000 worth of shares in a tech company called InfoSpace. Though Carl resisted the temptation to buy into the tech bubble for many months, he eventually succumbed and lost all but $81 of his investment. According to Wikipedia, the company's stock price reached $1,305 in March 2000 and fell to $2.67 by June 2002. (I should note that some of these high-flying tech companies fudged on their financial statements, making it difficult for an investor to judge value. Since that time, the SEC has instituted stricter controls for financial reporting).But Carl hasn't let his past mistakes define his future, nor has he allowed this loss to keep him away from the stock market. Instead, he has developed a deeper understanding of investing as putting money aside to invest in the economy over the long term. He now encourages people to invest, not speculate, as a way of building wealth over time.
- Stick with an investment plan. Carl suggests that you craft an investment policy statement in your lucid moments, and then stick with this plan. Specifically, don't let market fluctuations frighten you or major upswings excite you, and cause you to deviate from your plan.The content of this plan may vary but should reference your long-term goals for investing as well as the frequency of portfolio reviews and rebalancing.As a method of sticking with your plan, Carl makes a couple of recommendations:
- Hire an advisor or engage an objective third party to help you stay the course. This person should be able to reassure you during a market crisis, dissuade you from jumping into speculative ventures, and prevent you from making a big mistake with your money.
- Ignore the media circus surrounding finance and the stock market. Or, if you do watch newsy finance shows, enjoy them as entertainment, rather than solid journalism offering reliable insights into market or stock direction.
Refreshingly, in The One-Page Financial Plan: A Simple Way to Be Smart About Your Money, Carl recognizes that “life happens” yet despite difficult periods, imperfections, and mistakes, we can thrive financially and personally. So, the big takeaway for investing is that you should not fret over what has happened in the past (whether you've speculated wrongly, panicked and sold investments at a low point, or haven't even started investing), and you should not be anxious about the possibility of future mistakes or market downturns. Instead, consider following a simple path to building a diversified portfolio.
Disclosure: I received a copy of The One-Page Financial Plan courtesy of the XY Planning Network.