How do I get over my fear of losing money when investing?
I’ve never invested before, and I am extremely risk-averse. I’m trying to put aside some money for investing, but I’m loath to invest where there may not be a guaranteed win. I want to feel more secure about my financial future, but I also want a form of investment that is safe and reliable. How can I invest in something that will get me a return, but with minimal risk?
Here’s something to ask yourself: are you risk averse? Or are you just scared of losing money? Although risk and fear might seem the same, it’s good to understand the differences.
People often think of something that is risky as something to be scared of. They think of risk in emotional terms. However, fear is not a good measure of risk.
It’s best to think of investing like driving a car, where there are many factors that influence how risky doing it is.Credit:Simon Letch
You can be scared of something that is really low-risk (like cobwebs). Equally, sometimes people are not scared of something that is really high-risk (like smoking or driving).
This is important to understand because fear can often cloud our judgment of risk. People who are scared of investing, for example, will often misjudge the risks of investing and underestimate the risks of not investing. This leads to poor decision-making (which is risky in itself).
So, think of being risk averse as making educated decisions to prefer options that reduce risk exposure, even if it means intentionally leaving some potential rewards on the table too.
For example, someone who fears driving might avoid it altogether, or experience a lot of anxiety if they do drive which could make them hypersensitive to changing traffic conditions.
However, someone who is risk averse may just choose to take certain precautions to manage the risks associated with driving (like preferring to drive slower even if they’re running late).
When it comes to investing, the question should not be “how can I avoid risk?” because, in truth, there’s no real way to do this. All decisions carry risk. Investing is risky, and so is not investing.
Instead, a better question is: “How can I manage the risks of investing in such a way that I’m taking on the appropriate amount of risk for my situation?”
The competence of the investor plays an enormous role in how financially successful an investment plan turns out to be.
So, this begs the question – what are the risks of investing?
The most common misconception people have is that investing is risky in the first place. This is not entirely wrong, but it’s not telling you the full truth.
It’s more valuable to think of investing as an activity (like driving a car), and there are many factors that influence how risky that activity is. For example, when driving a car, the traffic conditions, the weather, and the competence of the driver all impact how risky driving is.
Many people think that the only risk in investing comes from what you invest in, and therefore the main goal is to find a lower-risk asset. But the asset is only one factor that contributes to the risk you take on as an investor.
There’s something that is often far riskier than what asset you buy, and yet, it’s usually the most ignored risk factor when it comes to investing: the investor themselves.
The competence of the investor – their ability to make good investment decisions, their emotional resilience in the face of market movements, the clarity of their investment goals, their commitment to their investment plan, and their financial capacity to absorb loss – plays an enormous role in how financially successful an investment plan turns out to be.
Two people can buy the same investment and have different outcomes because they made different decisions relating to that investment. For example, maybe one person was nervous, so they invested less money, or they panicked when the market crashed and pulled their money out, or they bought the investment through a fund or platform that had high fees.
This is why simply giving you a list of some low-risk investment options wouldn’t necessarily be moving you in the right direction.
Going back to the car example, no matter how low-risk the vehicle, you’d feel more confident giving your car to an experienced driver than a complete novice who didn’t know how to drive.
So, if you really want to minimise your risk when it comes to investing, start focusing less on what asset to invest in, and start focusing more on strengthening your skills as an investor.
The risk of whatever investment you choose won’t be any lower, but you’ll be more confident in your ability to manage the associated risks.
- Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. Investors should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.
Paridhi Jain is the founder of SkilledSmart, which helps adults learn to manage, save and invest their money through financial education courses and classes.
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