For me, the fear of losing $50 is far greater than the joy of winning $50. It probably explains why I don’t gamble. Why am I so afraid of losing money? Well, it all comes down to what behavioural economists call loss aversion – that is, when ‘losses loom larger than gains’. It’s also the reason why most of us tend to remember price increases rather than price decreases.
Phil Slade, behavioural economist and author of Going Ape S#*t! says our fear of losing stems from our survival mechanism. “When coming across an empty cave, those who fear what might be inside are more likely to survive than those who don’t. Natural selection favours those who are risk averse, and so taking $50 away from you hurts to a greater degree than the joy you receive by being given $50.”
While loss aversion is a natural human behaviour that exists to protect us, it can sometimes do the opposite. It may end up influencing our decisions so that we miss out on potential gains.
Let’s say, for example, that you’re afraid to invest in the sharemarket because you are worried about losing all your money. In this case, fear of joining in (FOJI) can be just as bad as fear of missing out (FOMO). FOJI is an anxiety that may prevent you from moving your cash from a safe bank account to, say, the sharemarket.
One way to try to overcome this fear is to flip your thinking around. Think about it this way: If you don’t invest you run the risk of not having enough money for a comfortable retirement. Another way to take control of your fear is to get an understanding of how investing works.
5 common financial fears and how to deal with them
There is no stronger emotional driver that influences our behaviour more than fear. Let’s take a look at five common financial fears.
1. I could lose it all
Yes, you could. But then again cash left in a bank account also could lose you money. That’s because although right now inflation may be low, interest rates are even lower. The wash-up is that you’re not being compensated for the loss of money’s purchasing power.
The fact is that while markets fluctuate – and that includes both sharemarket and property market – discipline, time and patience can pay off. Vanguard’s 2020 index chart shows that, since 1990, an initial $10,000 investment in the broad Australian sharemarket would have yielded 8.9%pa and grown to $130,457, while an investment in US shares would have returned 10.3%pa to reach $186,799. A $10,000 investment in cash would have returned 5.1%pa growing to $44,172 over the same period.
Tip: Start small. You can build up your confidence by starting with lower-risk investments such as bonds. Micro-investing apps are also a great way to build up confidence without needing large sums of money. You can then start putting your money into investment opportunities that carry a higher risk for a potentially higher return.
2. It’s all too complicated
I get it, the investment world is full of buzzwords, acronyms and complicated strategies, but by keeping things simple you should be able to curb those investment fears. Education can also play an important role in helping you manage this fear.
Try to concentrate on what you need and want to reach your goals, the risks involved and, of course, make sure you’re not paying too much to do so.
Building wealth is about buying good quality assets and holding them for a reasonable amount of time. If you can ride out the bumps then you should end up doing pretty well.
As for where to invest, don’t overcomplicate things. There really are only a handful of options you can invest in – yourself, cash, fixed income, property and equities. There’s nothing mysterious about these asset classes.
Tip: Investing can be as complicated as you want it to be. You can do it on your own. Get a money buddy, use a robo-advisor, or see a financial advisor. Just be sure to act and don’t be afraid to get expert advice when needed.
3. You need money to make money
The old saying that “It takes money to make money” is somewhat true. It certainly makes it easier, but (and this is a big but) you don’t need a lot of money to start building wealth. In fact, you can start investing with as little as $100.
Thanks to fractional investing, investing has never been easier. Fractional investing is when a platform buys a whole share, for example, and divides it up so that you can invest in a share of a share. Keep an eye on the fees, though. The smaller your balance, the bigger the impact fees can have.
Tip: For investors starting out, fractional investing is a great way to pick up some financial nous.
4. I don’t know when to jump in, jump out
Nobody really does. Unless you’re an active day trader, I wouldn’t be too concerned with this one. The phrase ‘time in the market is better than timing the market’ applies here.
Ironically, often the best course of action is no action. Let me explain … in a falling market you may be tempted to move your investments out of a balanced option, for example, into a conservative option. If you do this, you crystallise your losses and if you don’t get your timing right you could miss out on the rebound when you switch back.
Tip: Work out some solid investment rules and write them down where you can see them easily. For example: “I will invest no more than x% of my total capital in any one stock.” “I will take most profit at x% to x%.” “For every dollar I spend on renovations I need it to return x%.” Phil says knowing that you have an agreed exit plan lowers fear and increases confidence to take hold of potential opportunities.
5. What’s the point – I’ll never have enough to retire
Knowledge, preparation and action are the three key ingredients required to get you started in investing. It’s not unusual to feel overwhelmed when it comes to building wealth – especially if you’re just looking at the end picture.
According to the Association of Superannuation Funds of Australia, to have a ‘comfortable’ retirement, single people will need $545,000 in retirement savings, and couples will need $640,000. It sounds like a lot – and it is – but break it down to smaller chunks and it may feel more achievable thanks to time and the power of compound interest.
Let’s say that you invest $5,000 at an interest rate of 6% a year and you do not add any further contributions. At the end of the 12th year your money would have doubled. Simple as that. It’s no wonder Albert Einstein called compound interest the ‘eighth wonder of the world’.
Tip: Work backwards and put your current investment strategy to the test. Will it help you reach your goal? If not, then you may need to start investing and not just saving.
This is an edited extract from Ditch the Debt and Get Rich (Are Media Books, RRP $29.99), republished with permission.
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