Investing can be a dangerous yet profitable endeavor. Many people have been burnt and decide not to ever invest again. This is the primary fear of investing in anything. They may give you excuse such as ‘I don’t have enough money or ‘I don’t know where to invest’. But the number one fear is always the fear of losing money. If a novice investor knows that he won’t lose money, he must have used all means necessary (such as a loan) to buy as much investment opportunity possible.
Investing here can mean a lot of things from buying gold coins to real estate. However, common stock is the most popular form of investing since more than 50% of the US household invest in it. There are several ways of how to reduce your fear of investing in common stock.
Get Educated. When you know more about something, you are more certain of your outcome. When you know how to calculate the fair value of the common stock, you will know your expected return on investment. Remember that the less uncertainty you have, the less risk you undertake. You will also know more about the downside risk of your investment. If a common stock has $ 3 per share of positive net cash, is profitable, and is currently trading at $ 5 per share, then you know that it won’t trade at below $ 3 per share for a long period of time. Your maximum possible risk here is 40% of your original investment.
Start Small. When you begin your investing journey, you have a lot of unknowns. Less education means more unknown which means greater risk. How small should you start? As much money that you can afford to lose. If you still have no idea, then how about $ 1 a day? One dollar a day will give you $ 500,000 after fifty years of investing with a 10.5 % return. Even if you have $ 500,000 right now, you should start small if you are a novice investor.
Pay Yourself First. By this, it does not mean that investors use their money to buy unnecessary stuff. Pay Yourself First means that you find an investment that can pay you first as investors. What investment can pay you first? One thing that comes to mind is buying a common stock that historically has steady or increasing dividends. There is one more way to pay yourself first by selling covered call options. However, for novice investors, we suggest we put this subject off until you get really really comfortable with investing in common stock.
Learn From Your Mistake. Once you begin investing, the fear of losing money is always there. The best way to learn is from your own mistake. But to hasten your learning curve, we have compiled a list of 15 common investing pitfalls that is frequently committed by novice investors.
Will you be fear-free after reading this column? The answer is no. Fear is always there because of uncertainty. Successful investing is about predicting the uncertain future. Even investing in your money-market account is uncertain. It involves some small risks. The risk might be inflation being higher than the interest rate offered. There is also uncertainty regarding the direction of the interest rate. The interest rate used to be in the high single digits during the 1980s. Look where it is now.
We live in an uncertain world. Instead of hiding behind the wall, we need to embrace it and educate ourselves to reduce the uncertainty. Doing this will in effect increase our investment return beyond the rate of inflation.