For millions of years, fear has kept us safe from predators, a vital characteristic, that has kept us alive. While fear has played a vital role in our survival, it has contributed very little in our evolution. What has helped us in evolving as the most advanced and intelligent species is knowledge. Knowledge about our predators has helped us in exploiting their weakness, helping us gain control over them. Knowledge has led to the greatest inventions in the history of mankind. In conclusion, while fear keeps us safe, knowledge helps us overcome those fears. By educating and gaining knowledge about the market, you can overcome fears of investing. Some of the most common fears of investing and ways to overcome them are discussed below:
Fear of losing money:
One of the most common fear of investing in stocks is the fear of losing money. Market meltdown, and seeing your hard earned money being wiped out right in front of your eyes is the worst nightmare for an investor. So is there a way to overcome your fear? The answer is yes!. Fear is an emotion, and if you can find a way to make investing an emotionless activity, you can eliminate fear of loss.
Automate it using cost averaging:
One of the best ways to invest in stocks without being fearful is to automate the investment process. This is also called cost averaging. Cost averaging means putting small amounts of money regularly in equity market for a long period. This process has two advantages:
- It takes fear of investing away as you are not investing huge amounts at a time
- It does not require large sums of lump sum money to invest in equities, which makes it affordable for everyone.
Another advantage of cost averaging is that when market crashes, you get more shares for the same amount of money invested. For example, if you are investing Rs. 10,000 every month in a stock which is currently trading at Rs 100. You get 100 shares of the company (10,000/100=100), next month, the price of the stock corrects and is now trading at Rs. 70 per share, for the same amount invested (that is Rs, 10,000) you get approximately 143 shares (10,000/70=143 approx). You don’t even have to track the market on a daily basis just keep adding small amounts of money regularly, and you will make huge sums in the long term.
Lack of knowledge:
Many investors struggle because they do not have adequate knowledge about investing. I have often heard people saying “ I am not a financial analyst or a stock market expert, How can I pick right stock for my portfolio?”. I can totally understand this situation as I have been through the stage where I had no knowledge of stock analysis, and it was frustrating. Over the years I have developed my knowledge that I am now able to pick right stocks for my portfolio without any help from a financial analyst.
Be prepared to learn:
Stock analysis is a learn-able skill and it is not a rocket science either. There was a time when I had no knowledge about investing and stock analysis. Slowly I developed my knowledge by reading and putting this knowledge to work. Trust me, its a gradual process, you wont learn it all in a day, it takes time, but knowledge once built pays lifetime returns.
So, be ready to learn about market, read books, read annual reports and financial statements. You may not fully understand everything in the beginning and that’s absolutely okay. Take some time out of your daily schedule to read, and slowly your knowledge will develop like compound interest.
Fear and Greed:
Gaining knowledge and being able to implement it, is just 20% of the entire process, the real test for an investor’s strength and endurance is tested by how he reacts to market movements. Most of the inexperienced and even professional investors behave irrationally while dealing with ups and downs of the market. When a stock rallies, many investors jump in to buy that stock. Such behavior is called “fear of missing out”
A stock touching new highs everyday give a false but strong belief to the investors that there is something great about the stock. By chasing a hot stock, you end up buying it at a high price. When market corrects, and price of that stock falls to its normalcy, investors lose money leaving them with nothing but regret of loss and fear from stocks.
Don’t let emotions drive your decision making process:
Emotion is our reaction to an external event, and it varies from person to person. Two persons facing the same situation may react very differently from each other. There is no method to teach someone how to react to certain situation, there is no formula or set of rules to follow that can help, it is something people learn from their personal experience.
No matter how good your stock picking skill is, if you let your investment decisions be driven by emotions, there a good chance for you to end up making little or no profit or even lose money.
The only way to become more skilled in rational decision making is by trying, failing and not giving up. It will take time, it will test your patience, but once you learn to command your emotion instead of letting them command you, you will become the master of art of investing.