Investing your money in the stock market is one of the best ways to grow your wealth. This is not a “trick” I am trying to play on you, it is something I know through my own experience. But maybe you are still apprehensive. And that is understandable because human beings naturally fear what they don't know or understand.
Is this why some people think equity markets are “scary? Most people’s first reaction is yes. The volatile nature of stock markets makes them uncomfortable. However, what makes you uncomfortable is not what you should fear. Volatility can actually create opportunities for smart, experienced investors.
Stop Believing In Something That Isn’t True
When I was a little kid, a seasonal tradition was watching Halloween cartoons. One of my all-time favorites was the Peanuts classic “It’s the Great Pumpkin, Charlie Brown”. I’m sure you can stream it any time you want now, but it was considered an annual ritual for my sisters and I to sit down in front of the TV and watch it live on CBS.
In the cartoon, Linus writes a letter to the Great Pumpkin. He skips trick-or-treating, choosing instead to wait on Halloween night in the pumpkin patch for the Jack-o-Lantern to appear. When Linus sees a mysterious shadowy figure (which turns out to be Snoopy) rising from the moonlit patch, he mistakes it for the Great Pumpkin and faints.
Charlie asks Linus: “When are you going to stop believing in something that isn’t true?”
Are you a Linus? Are you waiting and wishing for a “magical being” to increase your wealth, only to end up paralyzed and afraid of the unknown? What delicious treats could be yours if, instead of wishing for a great portfolio, you take action today to create it?
A Financial Trick or Treat?
Let's learn a bit more about how the markets work.
Historically, the stock market has reliably produced better returns over time than real estate, bonds, certificates of deposit, or other investments. However, there is a common fear that limits many people from investing in the stock market and building wealth: fear of loss.
Let’s say after finally building up the courage to invest, stocks suddenly drop. No! What if the market keeps dropping? Fear of even greater losses causes many people to sell low and then miss out on a recovery, because fear again prevents them from buying back in.
Let’s use an analogy (one of my favorite tricks) to make this as clear as possible. Your “portfolio” is similar to your kid’s Halloween bucket. The candy is the “securities” and the amount of candy is your “return”. And “asset management” is not that far away from how we encourage our kids to behave every Halloween
Some observations about Halloween (and portfolio management):
- It’s not advisable or fun to have just one type of candy (stock) in your bucket (portfolio)
- The better your costume (advisor), the higher the probability of candy (return) maximization
- Systematically and deliberately going house to house (rebalancing) results in a higher candy yield
- Strategically knocking on doors known to deliver full-sized candy bars gives you a highly desirable outcome and lower physical cost per piece (dollar cost averaging).
- Avoiding houses with a “Michael Myers look-a-like” in the window is a smart tactical move (concentration risk, permanent loss of capital)
- A boring bag of pretzels, a pencil or even an apple (asset class diversification) is sometimes preferred to offset all the sweets since too much of a good thing can also rot your teeth (mean variance optimization)
Another way this analogy rings true? I don’t know about your kids, but all the children in my neighborhood can’t wait to get home to trade candy with friends and siblings.They end up with an assortment of candy that is exactly right for them.
I am in awe of how my kids “make a market” in candy at the end of the night on Halloween and I am convinced that I am witnessing the last open outcry markets left in the world. They naturally created their own Candy Stock Exchange. It’s brilliant.
Put yourself back into the mindset of a kid dressed up for Halloween. Here are three easy “tricks” to get you past the fear of investing:
Trick One: Start Small and Watch Your Treasure Grow
If you want to have a full bucket of candy at the end of the night, you’ve got to work up the courage to go to the first house. Putting a ton of money on the line at one time can be scary. Fortunately, you don’t necessarily have to invest everything you have saved at once.
You can start by investing just a few hundred or a few thousand dollars. And then use dollar cost averaging to buy in at different prices. As you learn and get better at understanding different investments, you can put more money into your account.
Trick Two: Commit to the Long-Haul
If you start trick-or-treating at dusk and end at midnight, everyone knows that you are going to have much more candy. This same concept is true in investing. The earlier you start, and the longer you let your money compound, the more wealth you will build over time.
This requires stamina, however. And also practicing delayed gratification. If you struggle with these things, consider a professional tractor driver to pull you around on a hayride (a wealth advisor) to make your life easier.
Trick Three: Collect an Assortment of Treats
Diversification means you don’t just have “one flavor of candy” – you invest in lots of different things so that if one investment performs poorly, others may do well and compensate for your losses. So have some Skittles and Twizzlers, but don’t forget a chocolate Kit-Kat for balance.
I completely understand the seduction of wanting 100% Reese’s peanut butter cups. And, honestly, that might be how some people find financial success (like small business owners or executives with stock options).
But for the vast majority, mixing and matching investments to limit your exposure to permanent loss is the best way to balance risk and reward and overcome a fear of investing.
Don’t Be a Scaredy-Cat!
Don’t let Lucy pull the power of this particular football away from you. And don’t be a Linus and let fear of the unknown keep you from having a Great Portfolio, Charlie Brown.
If you’d like any additional help overcoming your fear of investing, I’d love to chat with you. Book a complimentary 30-minute discovery call and let’s sweep those cobwebs away and help you start enjoying all the treats the stock market has to offer.Have a boo-tiful Halloween!