Many people may be hesitant to invest out of a fear of losing money. This is certainly valid – most of the financial decisions people make are attributable to and driven by this concern.
While being mindful and cautious with your money is a good thing, it could also hold you back from reaping dividends and multiplying your existing wealth.
In the context of stock investing, here are some lessons to consider if you are afraid of incurring losses.
1. Identify the root cause
What is the primary reason behind your reluctance – is it due to any particular incident? Did you, perhaps, witness the pain and dejection of a parent or loved one who had suffered losses from investment, and the emotional impact it had on your family?
Or could it be due to conditioning over the years, such as being perpetually told by influential people – parents, friends, and so on – that investing in the stock market is a fool’s game?
Might it be your own observations – stories you have heard, articles you have read – that have caused you to cohere with this belief that stock investing would lead to losses?
It would be helpful for you to firstly try to understand the reason behind your fear.
2. Embrace this fear
Once you have identified it – embrace it. Turn this fear into an edge in investing. It could be an invaluable asset that keeps you humble, grounded, and teachable on sound investment principles.
Today, most successful investors remain successful because they have this fear and know how to manage it. Really, it is a bigger problem if you do NOT have a fear of losing money.
After all, nobody is financially invincible, and having such a conviction might indicate you don’t truly understand the value of money.
3. Take baby steps
There are two choices you could make in dealing with the fear. You could avoid investing altogether, although this would be akin to avoiding getting behind the wheel for fear of a road accident.
Or you could learn how to invest, managing the fear with education and experience. Start your journey with books on investment, and learn lessons from the wealthy and successful.
Keep on gaining knowledge by identifying fundamentally solid stocks, and carry out valuations. This involves reading financial statements and knowing how to calculate ratios. Master and sharpen your craft of assessing investment deals.
Yes, it’s a lot of reading – but the more you learn, the less and less frightening the whole concept of investment will be.
4. Build a prototype portfolio
Over time, you could craft a theoretical investment plan that consists of your objectives – for instance, to build a RM10,000 investment portfolio, and aim to generate at least 4% per annum in dividend yields – as well as a system.
The latter could involve:
- creating a watch list of fundamentally solid stocks;
- analysing a stock’s fundamental strength based on its profit consistency;
- valuing stock and considering buying if the dividend yield is greater than 4% per annum; and
- considering buying if the dividend yield exceeds long-term averages.
While the objectives are to earn dividends and attain capital gains, the ultimate goals here are education and experience, which would serve you well in the future.
5. Deal with losses
Although you might start with sound principles and an investment plan, mistakes could still happen – in fact, they are probably inevitable.
Still, knowing when to cut your losses, and identifying which stocks to hold on to and which to let go, are all part and parcel of the process that can only help you grow into a better investor.
In the long run, these skills – born out of fear – could help you manage ever-bigger portfolios while keeping you grounded and rooted.
At the end of the day, the key issue is not having the fear itself, but how you choose to deal with it. If you choose to overcome it, you will experience a freedom that can only be derived from possessing savvy investment skills.
This article first appeared in KCLau.com. Ian Tai is a financial content writer, dividend investor, and author of many articles on finance featured on KCLau.com in Malaysia, and ‘Fifth Person’, ‘Value Invest Asia’ and ‘Small Cap Asia’ in Singapore.