Investment Basics: First, Defeat Your Fears

Posted on May 15, 2014 at 2:46 PM PST by

What are we afraid of? Mostly, the unknown. Meeting new people, the dark, unexpected personal disasters.

Once we get to know and understand something, often we learn to put that fear into perspective. It becomes manageable, or least less scary.

When it comes to investing, fear is a big problem. People are overwhelmed by choices they feel ill-equipped to measure. There are many new terms and concepts.


Often, we look for guidance to get a handle on those fears. Books help, and so do some websites (others, quite the opposite). Talking to peers can demystify some aspects of the investing challenge.

Yet our more competitive friends, who often seem completely self-assured, can cause newfound stress. What if I’m doing it wrong? What if the market collapses tomorrow? How can I be sure that the risks I take are worthwhile?

The short and simple answer is, you can’t be sure. If you could be sure, it wouldn’t be risk. But you can do a lot to lower unnecessary risk, and you can learn enough about investing to become much more comfortable with the ups and downs of the markets.

One good way to start is to read The Elements of Investing, by Burton Malkiel and Charley Ellis. These two men have between them spent decades upon decades in the business, and they have come to a very simple conclusion: Investing itself isn’t that hard.

What’s hard is stepping back and avoiding the emotional traps that, too often, you set for yourself. For instance, stock picking can lead to extraordinary levels of fear as individual investments rise and fall over time.

Likewise, economic changes and news headlines can lead investors in and out of the markets, hoping to capture gains in the short-term. It rarely works out and, when it fails, that strategy can fail spectacularly.

Finally, investors often get stuck in something that feels like the opposite of fear: The temporary joys of chasing a bull market ever higher.

When that bull market ends and a bitter bear market follows, investors end up living with another, entirely different kind of fear. They fear getting back into investing, even when they should. The stress levels are soon higher than ever.

Whole markets

How can you overcome these fears? By depersonalizing your investments through index funds. Owning the whole market breaks the close relationship one feels from owning single stocks.

The next important step is to own a broad mix of asset classes.  That way, a sudden decline in one part of the market is offset by a corresponding rise in another.

Finally, active rebalancing — selling gainers and using the cash to buy into parts of the portfolio out of favor — allows you to capture gains and snap up bargains in a stress-free, no-fear way.

It takes some getting used to, but investing through a balanced portfolio is the kind of security-blanket approach that retirement investors need to overcome fear of investing. In time, almost no headline will faze you.