Are You Afraid Of Losing Your Hard Earned Money?

Sat, 11 June 2016

I thought to address this feedback as this is one of the most common responses I received.

Are You Afraid Of Losing Your Hard Earned Money

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It is okay to worry you might lose money. On the contrary, it is dangerous if you don't. Fear means you recognize the risk of stock investing and it keeps your confidence level in check preventing you from making reckless decision.

​You should have a process in mind knowing what your decision be if the market moves up or down before you even started buying stocks. Especially when you don't have much experience in investing.

So long it does not paralyze your decision making or causing you losing your sleeps. You are fine.

​I see investing as the effective use of financial resources to improve the quality of life. So investment returns are just half of the equation, if my investment is sucking too much out of my time, breaking me out in a cold sweat whenever the bad news hit or prices fall. My quality of life becomes worsen instead of better off, even if the returns are good I would think it is a bad investment.

Ultimately why you want to invest is not just because you want more money — that's all. Rather it is the benefit of what money can bring to you like more time, more freedom and the option to do what you want. However, if your investment is draining too much of your time and energy then you might want to reconsider what sort of investment or strategy suits you best.

(I'm hinting that stock investing is not just stocks picking! And this does not apply to someone who has burning passion about the market or is an aspirating full time investor)

For sure, there is always a trade off. You can't expect to get higher than fixed deposit or market beating returns without putting more effort. But the question is have you adequately anticipated the amount of time and energy it needs to achieve the desired result? Just time and energy alone, is something that the majority have severely overlooked including myself.

Alright, below are 4 of the quick and dirty techniques/ways to reduce your fear as it increases your odds of success:

#1. Don't cherry pick stocks. The odd is not in your favor, as an amateur chances are you will either underperform the market index or lose your money and falling into depression. Ton of research have shown that even professional fund managers fail to outperform the index consistently over the long term. So it is better you do sensible investing like invest in STI ETF to enjoy the performance of SGX blue chips than cherry picking the right stocks.

#2 Start small. The sum should not cause you panic when its value falls by 20%; expecting it to happen once every 2-3 years. But how small is small? Or what is considered as an adequate sum to start off with?

I know it sounds trite and I hate it. But it really depends on your capital size and risk appetite. One way to figure out is to do a simple “20:50 Drop-test”

This is not an exact science but it is based on the notion that market on average halves its value in every 10 years known as crisis, and 20% drop in every 2-3 years known as correction.

Start off with an imaginary $100 investment capital and ask ‘what if the market drops by 20% within the next 2-3 years, would I feel ok with it?’ If you are then add a zero behind and repeat the same process:

$100 becomes $80. Are you ok to lose: $20?

$1000 becomes $800. Are you ok to lose: $200?

$10000 becomes $8000. Are you ok to lose: $2000?​

$100000 becomes $80000. Are you ok to lose: $20000?

You got the idea.

Then do the same test for the 50% drop within the next 10 years. Whichever amount you feel comfortable with that is the adequate amount to start off with.

#3 Invest only for the long term. The stock market is volatile, especially during extreme uncertainty. Short term prices fluctuation are unpredictable; mid and long term performance are more certain. Invest with the view of 10 years time horizontal, remember: market index almost always goes up over the long term. Not short nor mid.

This does not apply to individual stock. The time you bought may represent great value but over time its competitiveness may deteriorate due to unable to react to the changes in the market condition. What you gain on capital or many years of collected dividends could not compensate the loss you suffered when the prices collapse. In this regard, buy and hold strategy, investing for long term may not make investing sense. But that is not to say buy and hold does not work.​

For instance, investing in STI ETF may seem like a buy and hold strategy, which it is the case at the investor level, however, it is not at the index level. There is a selling mechanism in place should the stocks fail to satisfy the index criteria.​

#4 Avoid lump sum investment. Market on average moves up 2/3rd of the time, by this assumption you'd be better off with lump sum investing. However, since we are dealing with fear which can negatively affect your investing decision. Hence it is okay to trade off better returns for a peace of mind. And the last thing you want to do is to sell at the worst possible time because you are mentally unprepared for the market volatility. Do dollar cost averaging instead.

At this time, don't just pay attention on your stocks performance but also observe your own emotion. How do you feel when the market is on wild swings? Are you able to remain cool or you feel like your world is about to end. At the beginning stage, invest what your stomach allows not how much you would potentially make. As you get more experience, your level of confidence will increase and that is where you can slowly increase your investment capital.

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​I know some of my suggestions may not be what you want to hear but when it comes to investing it is better use an approach that have high probability of making you money than being sexy.

Hit the reply button and let me know what you think.

I read and respond to every Email.​

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