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

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 […]

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