Investing Fears and Mentoring: Friends Don't Let Friends Not Invest

My good friend Andrea was here visiting this weekend and I helped her set up her first IRA. Although her dad had been telling her for years that she should start one up, her various fears of investing had become barriers to her getting started. I set her up on her first account through Sharebuilder and walked her through the process of setting up an automatic investment plan. Along the way we had a great discussion about her fears of investing, and I had the chance to help her overcome those fears. Below is a brief list of some of the common fears that one might have before investing, and the reasons not to let those fears prevent you from taking the plunge as an investor:

1) Investing is complicated: While the stock market as a whole can be endlessly complex, this actually has very little to do with long-term investing. A very basic portfolio of Exchange Traded Funds, with a minimum of effort or research, can be an effective way to invest simply for retirement.

2) Investing is risky: While there is inherent risk in all forms of investing, the stock market as a whole is remarkably predictable when viewed on a long enough time frame. Over the last 70 years or so, the stock market as a whole has produced gains of approximately 10% per year on average. Even major downturns, such as the dot-com bubble a few years ago, appear to be relatively small as long as you have the wherewithal to ride through the ups and downs and keep your eyes set on the long term results. Diversification is the way to minimize risks, and a portfolio made of index ETFs is inherently already diversified to protect you from the risks of investing in any one individual stock.

3) There is time to invest later: A cursory look at the results of tinkering with a compound interest calculator like this one will show that waiting to invest can have a seriously detrimental impact on the long-term yields of your investments. Time is your friend when investing. While it is no use to beat yourself up over not having started with investing sooner, there really is no time like the present. Just getting started is half the battle with preparing yourself for a decent retirement. Remember, if you never get started, you will never benefit from investing. Even if you make some mistakes early, those mistakes are generally offset by the power of compounding over several decades. Remember, you can always tweak your portfolio later if you like, but you can only do so if you get started today. Waiting to invest wisely is the true danger of investing.

4) Stock brokers are crooks: While it is true that there are dishonest people in almost any profession, as a rule most people are fairly honest. Going with a large and reputable brokerage will eliminate most of this danger. I might worry about handing my money over to a complete stranger, but I probably wouldn't worry about trusting it to a large company such as Sharebuilder, Scottrade, etc.)

5) I can't spare the money: Practically everyone is able to set aside 10% of his/her income. If this is not the case, the real reason is likely to be an inability to live within one's means. In this consumer society we live in, spending is considered the norm. One has to break the cycle of needless spending to be able to afford to invest. Once you start keeping track of where your money goes, however, you are likely to see that your necessary expenses are actually quite minimal and that you are wasting a fairly large amount of money on things that are best considered luxuries. What "necessary expenses" means will vary from person to person, but most people could cut back on discretionary spending with a modicum of effort.

While there are certainly many more reasons than these five, I have found that the above fears are the primary barriers to getting started in investing. But they are just that: barriers; barriers which are set up chiefly in the mind as a safety mechanism. But one can never enjoy the many benefits of investing and sound personal finance management if one doesn't find a way to tear down the barriers erected in his/her mind. Don't sabotage your own future; get started today and find someone more knowledgeable than you if you are having trouble taking the plunge. A good mentor who has already overcome the barriers is a good way to do so because they will be able to explain how they themselves overcame them and benefited from doing so.

So kudos to Andrea for getting past the barriers she had built up in her mind and starting her Roth IRA! It was certainly fun and satisfying to help a good friend get started on the path to a sound financial future. It will be well worth it when we are all, our entire friendship cadre, retiring together in style!


limeade said...

There's fear associated with almost anything we've never done before. The first day of school, the first time riding a bike, and the first time investing.

Learn as much as you can and then try it out. You'll learn more by doing than any other way.


The Deprived Investor said...

Really liking the blog there Zachary....I'm glad I'm linking to it because I just can't offer the understanding of financial topics you're giving. Well done

dong said...

Couldn't agree with you more on this topic. While most of my friends are invested, and have pretty open dialogs with them about their finances, one of the girlfriend's friends is really wallowing. She's passed up her comany's 401k match for the last 5 years - instead she overpays her studen loan which is fixed at something like 3.25% plus the tax break..... I feel my girlfriend and her friends have let this one friend down. They have tried to talk to her about but aren't quite as insistent as I might be.

frugal zeitgeist said...

Sounds like you're a good friend to Andrea. Thanks for writing up this list of fears; I can see you've really thought these things through.

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