Understandably, beginner investors can be hesitant to risk their capital in the hope of generating a return. The inherent volatility in the financial markets can be a daunting prospect for many people – and with the unpredictability of external events also adding to investment risk, it can leave some investors paralysed and unwilling to part with their capital.
However, there are some tried and tested techniques that you can use to overcome ‘Investophobia’ and increase your success as an investor. In this article, we’ll cover three of the most effective ways to reduce hesitation and get you on the right track.
What Is Investophobia and Why Do We Experience It?
The first step in overcoming Investophobia is understanding what it is and why we experience these feelings. Investophobia can be defined as a fear or aversion to investing your money. This fear stems from the concept that every investment comes with the risk of losing money – and nobody likes losing money! So, it’s important to note that Investophobia is a common occurrence and is experienced by investors worldwide.
This fear of losing money is rooted in psychological concepts. As humans, we all suffer from an inherent cognitive bias called ‘loss aversion’, which means that we feel the pain of loss twice as intensively as we feel the pleasure of gains. DecisionLab state that this cognitive bias stems from various factors, such as our neurological makeup, socioeconomic status, and cultural background.
Loss aversion ties into Investophobia as it helps explain why beginner investors feel hesitant to risk their money in the financial markets. A 2019 article by Yahoo found that 47% of people living in the US did not invest their money in anything – whether that be bonds, real estate, or the stock market, these people simply chose to keep their money in their bank account. Although this tactic may seem ‘safe’, in reality, it often isn’t the best solution – the eroding effects of inflation mean that this money isn’t being used optimally.
So, what can you do to help reduce fear-based hesitation when it comes to investing? Below are three valuable tips to keep in mind when you decide to invest your hard-earned money, which can aid you in overcoming Investophobia.
Tip #1 – Start Small
One of the best ways to overcome hesitation in the financial markets is to start with a minimal amount of money that you are willing to lose. Before you finalise your investment, make it clear to yourself that as soon as you invest, you will have the mindset that the money is already gone. This way, you’ll feel less attached to the outcome – thereby reducing the fear that you’ll potentially be losing money.
Referring back to the field of psychology, another phenomenon that can help us overcome fears is known as exposure therapy. Put simply, this refers to doing something that makes you feel uncomfortable or that you are fearful or – even though you do not want to. Over time, the thing that you were initially resistant to becomes much less scary, and you’ll feel much less hesitant to perform the task in question in the future.
Relating this to Investophobia, the process of starting small is essentially a sort of ‘exposure therapy’ for investing. As you get more comfortable with the process of parting with your money, it’ll be easier to risk more significant amounts in the financial markets. Eventually, your hesitation around investing will reduce to the point where it’s barely noticeable – allowing you to invest optimally.
Tip #2 – Have a Solid Investment Strategy
Another crucial step in overcoming investment fear is to have a well-researched and optimised investment strategy. A strategy that has been developed and backed with data is a fantastic tool to use when overcoming Investophobia, as it can help you to understand the probabilities behind the investment you are about to make. Understanding these probabilities in an objective sense will reduce the level of uncertainty around an investment, allowing you to feel more comfortable when parting with your cash.
Having an investment strategy or plan is also an excellent way to reduce impulsiveness in the market – which is also driven by fear. Impulsiveness stems from the fear of missing out and can occur when we see an opportunity in the market and feel that we must get involved. In reality, these opportunities come around all of the time, and rushing into investments without solid backing can be a sure-fire way to lose money. So, having a data-backed strategy can ensure you follow your plan and make decisions on objective criteria rather than your emotions.
Tip #3 – Understand the Nature of the Markets
Our third tip to overcome Investophobia is to understand that financial markets are fundamentally volatile, and there’s never going to be an investment that is 100% ‘safe’. Even with investment-grade bonds, there’s still a chance that the government or corporation issuing them could fall – thereby defaulting on the asset. Understanding that any investment you make could result in you losing money, and accepting this fact, is a cornerstone in getting over investment-based fear.
A great way to appreciate the market’s nature is to look at a major stock index like the S&P 500 or the Dow Jones. Go to any yearly period on the price chart, and you’ll see times when the price drops or pulls back; however, in the long run, these indexes tend to trend upwards. If you have invested in an asset that is well-researched and has a great chance of upside, then understanding that pullbacks may just be ‘bumps in the road’ can help you restrain from micro-managing your position and, therefore, ensure it has the best chance of success.
Investophobia is a real thing and is a common occurrence when starting your investment journey – there’s no escaping that fact. However, this article has highlighted why we feel this aversion to investing and how we can help overcome it. By understanding and using the tips presented above, you’ll be well on your way to reducing fear-based hesitation – and, in turn, increasing your chances of success.