Financial adviser on the best way to get over the fear of investing

Learning this skill is the key to working less while still having an income – but there’s one thing standing in most people’s way.

Most people realise investing is the key to not working forever, but unfortunately replacing your income through investing isn’t as easy as some make it sound.

There are so many options and noise out there it can be overwhelming. It’s hard to figure out what the very best moves are for you. And then there’s the challenge of pushing through the fear of making a huge mistake that costs you money.

The result is that you end up ‘stuck’, not necessarily doing nothing, but often stuck doing the same thing you’ve been doing in the past – missing the opportunity to get more out of what you have today.

Most people ‘figure out’ investing eventually, but cracking the code sooner makes a serious difference to your wealth levels over time.

To illustrate with an example: The Australian household savings rate is 13.6 per cent, which based on the average income of $91,000 before tax (or $69,108 after tax) means on average Aussie households are saving $9398 p.a.

If you were to invest one year of savings ($9398) into the Australian share market, based on the ASX long-term investment return of 8.8 per cent, this ~$9k from one year alone would grow to $130,434 over the next 30 years. The implication is that every single year you delay getting started, you’re costing yourself serious money.

The fear of making a mistake can be paralysing, but the key to overcoming investing fear is knowledge. You need to understand investing risks and how they can be managed to give you the confidence to take action.

Risk is good

All investments have risk attached to them, and what most people don’t realise is that risk is good – it’s ultimately what makes you money when you invest.

Investing into shares has risk attached to it, as does property, crypto, and investing through superannuation. And doing nothing also has risks attached to it.

The key to making the best investment choices for you is understanding your risks and how they can be managed and reduced, so you can establish which risks are right for you.

All forms of investing have risk attached to them. Picture: iStock.

For example, buying property comes with the potential upside of strong asset growth long-term, but this upside comes with risk. There’s interest rate risk, the ‘cashflow’ risk of having to fund mortgage payments, vacancy risk, as well as a handful of others.

For some people, these risks are acceptable, and for others they aren’t.

The key to choosing your perfect level of risk

If you don’t understand where your risk is coming from, it’s impossible to know how you could manage it, and therefore what you’re comfortable with and what just isn’t right for you. Here I unpack the key investing risks so you can start thinking through what’s right for you.

Growth vs defensive investments

One of the first big choices you need to make when you invest is how much of your investments to hold in ‘growth investments’ like shares and property, and how much to hold in ‘defensive investments’ like cash.

Defensive investments are generally fairly stable and have a low risk of going down in value, but they have a low long-term expected pay-off or return. On the other hand, growth investments are designed to grow and have a higher expected return, but come with a higher risk of going backwards.

Cash is a defensive investment.

Choose wisely here, as your split between growth and defensive investments is one of the biggest drivers of your overall investment return.

Nailing your investment timeline

Growth investments go up and down over time with the market movements, and if you’re ever forced to sell your investments at a time when markets are down you’ll lose money.

This means that for you to make money from your investments you have to avoid being forced to sell your investments at a time that isn’t right.

When you invest, map out the spending you want or need to do over the coming years, this way you can have confidence with any money you do invest that it’s not needed to cover your spending, and therefore you’re never going to be forced to sell your investments at a time that doesn’t make sense.

Good vs bad risk

Not all risk is made the same. When you buy shares in big, ‘blue chip’ companies you will experience the ups and downs of the markets, and see the price of your shares impacted by the performance of the company you’re investing into.

When you invest in shares in a smaller company, the ups and downs are there, but they’re generally more significant (more volatile).

When investing, it’s good to weigh up the risks you’re willing to take. Picture: iStock

This happens because large companies have a lot of assets, business activities and revenue streams that help to stabilise company performance. With a small company, the risk is more concentrated, the companies generally have fewer assets behind them, and as a result the investment returns can be much more hit or miss.

There are many different views on this, but my take is that until you build a solid level of wealth, focusing on more stable blue chip companies will help you build a strong foundation for your investment portfolio and set you up for a smoother investment journey.

Diversification

When you only have one investment in your portfolio, your investment return is simply the return on this one investment. But when you have two investments, the lows of one are balanced by the highs of the other, leading to a smoother return over time. This is the power of diversification, and why this is an effective tool to reduce investment risk.

The more investments you have in your portfolio, the less your total portfolio return is dependent on the return of any one investment. Taking a diversified approach to investing means you won’t get the same huge returns if you’re lucky enough to pick the next big thing, but on the flip side you won’t suffer through the pain and frustration that comes when you pick a dud.

The wrap

Investing is the key to money success, but it’s not easy. It’s natural to be fearful of making a dumb choice that will cost you. But getting stuck in the inaction trap essentially guarantees your money mediocrity, so this fear is something you need to overcome.

Taking your first big step on this path is often the hardest, but once taken you start building momentum you can leverage to make your next steps easier.

The key to overcoming investment fear and taking action is building your knowledge. Take the time to understand your risks, get clear on your strategy, map out your action plan – and then execute to drive the results you want.

Ben Nash is a finance expert commentator, podcaster, financial adviser and founder of Pivot Wealth, and author of the Amazon best-selling book ‘Get Unstuck: Your guide to creating a life not limited by money’.

Ben has just launched a series of free online money education events to help you get on the front financial foot. You can check out all the details and book your place here.

Disclaimer: The information contained in this article is general in nature and does not take into account your personal objectives, financial situation or needs. Therefore, you should consider whether the information is appropriate to your circumstances before acting on it, and where appropriate, seek professional advice from a finance professional.