The misconception about investing that scares a lot of people

“Oh, that sounds … complicated.”

I was in a conversation with a woman who was asking what I do for work. I explained that I help people understand how to better manage their finances and learn to invest.

“Oh, no it’s not. I think that’s the misconception that scares a lot of people. Once you know the basics, it’s a lot simpler than you think,” I tried to be encouraging. She didn’t seem convinced.

The proportion of female investors in Australia continues to grow steadily.Credit: Louie Douvis

“All I know is: ‘high risk, high reward; low risk, low reward’, right?” She laughed.

I hesitated. This wasn’t the place to launch into an impromptu investing lesson. But I also knew this was the mindset stopping so many women from getting started with investing.

The 2023 ASX Investor Study found the proportion of female investors in Australia continues to grow steadily (42 per cent of all investors) and half of all intending investors are women. More Australian women are investing outside their home and superannuation than ever before.

However, the study also found that women had smaller portfolios, more women had portfolio balances under $50,000 compared with men, and exhibited more risk aversion than men.

Further, the research found that the majority (64 per cent) of Australians who have never invested before are female, with lack of confidence and uncertainty about where to find the right or trustworthy information being bigger driving factors for women than men.

So, here’s what I wish I could have explained to the woman I was chatting with (and all beginner investors who might be scared to take the leap):

Investing is not as “risky” as you think

Technically, she wasn’t wrong. There is a relationship between risk and reward – often the potential for higher rewards comes with higher risks. But this lacks a lot of nuance.

The challenge is that most people have a flawed understanding of “risk”. This leads to poor risk assessment, where you overestimate some risks while underestimating others.

For instance, beginners tend to underestimate the risk of not investing, the risk of losing money to inflation, the risk of not being able to fund long-term goals (like a home, or retiring) due to insufficient returns on their money, or the risk of being dependent on a single source of income.

Beginners also overestimate the risk of investing because they’re unaware of the strategies available to manage risks – such as diversifying investments across asset classes, industries, geographies and even platforms or the power of “time in the market” versus “timing” the market.

This combination of underestimating the risks of not investing, and overestimating the risks of investing, often causes them to stay stuck in inaction and analysis paralysis out of fear.

Investing is not as complicated as you think

There was a time when investing was far less accessible than it is today. The innovations in the investment space over the past few decades have made investing cheaper, more accessible and more beginner-friendly than any time in recent history.

Today, ETFs and index funds allow you to get exposure to a broad “basket” of companies, so you’re not doomed if one company goes bust. Robo-advisers will handle things such as designing your asset allocation, selecting ETFs and even reinvesting dividends, allowing you a hands-off investing experience. Micro-investing apps enable you to start investing with less than $50. The internet gives you free access to more information than you could ever consume, so you can select investments with confidence.

These innovations dramatically reduce the risk and complexity involved with investing in a way that wasn’t available to investors just a few decades ago.

Investing creates more financial security than you realise

Far too many beginners tend to look at investing as a “hobby”. It’s an activity that “some people are into” and others aren’t. Like skincare or tennis.

Here’s a different way to look at it. Do you see having a job as optional? Is earning a salary optional? Sure, you might also enjoy working, but you probably also work for financial security. If earning an income and having a job is not optional, neither is investing.

It would be great if you did enjoy it, and after you overcome the initial learning curve a lot of people do. Either way, it’s something you should figure out because it’s crucial to creating financial security for yourself long-term.

In fact, if you could only make one financial move towards a better financial future, I’d tell you that investing will get you way further than worrying about hunting for bargains, savings hacks, budgets, and even gunning for promotions. Those things will make some incremental difference. But investing? It’ll change your financial trajectory completely.

Paridhi Jain is the founder of SkilledSmart, which helps adults learn to manage, save and invest their money through financial education courses and classes.

• Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.

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