How I Overcame My Fear of Investing
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Price-to-earnings ratio. Market capitalization. Operating cash flow. 20-day moving average.
Say what?
Back in college, these were the very terms of an overwhelming presence despite my growing interest in investing. When I hear that college students are buying luxury cars and eating out because they were making a fortune daytrading stocks, my intuition told me I can do it too. What a typical get-rich-quick pitfall that turned out to be.
Failure is a Lesson
I opened my first investment account with $500 (a significant amount of money for a college kid) through Scottrade with the push of a friend. And with that money, I bought shares of a small, growing company that seemed to have great potential on the day of their quarterly earnings report. There it is – the first stock I ever owned.
Immediately after the stock purchase, I was addicted and refreshing the stock quote like mad. On my way to class, I found that the company’s earnings did not meet analyst expectations and took roughly a 5% dive during after-hours. The next day, the stock fell approximately 10% from the price I paid.
And the dreamer in me was hopeful that it would eventually rocket to the moon and I refused to sell my shares to minimize my loss. Within months, the company went bankrupt.
That’s right. The first company I ever invested in went bankrupt. How’s that for welcoming me into the world of investing?
Luckily, I ditched my shares when the stock nearly lost 50% of its value. As with every negative experience in life, I didn’t want to go through it again. There was precious money on the line that I couldn’t afford to lose. My first investment instilled the fear of investing in general. As a result, I went on a 2 year hiatus.
Down But Not Out
While I didn’t have real money in the stock market, I continue to learn more about investing. Every morning, I’d wake up in my dorm room and turn on CNBC or Bloomberg. Not only was it beneficial to become regularly exposed to stock market news for the purpose of learning, it also serves the purpose of developing a filter to the “noise” of the media.
I took an introductory business course and a course in financial accounting. Understanding the basics of a business offers better decision-making when it comes to investments. Although financial statements may seem confusing to many investors, it actually reveals plenty of of clues regarding the performance and health of a company.
Because I didn’t want to lose the little money that I had, I played around with investment simulations. It was fun to mess around with short sales, options, and whatnot but like many other people, I tend to not take my stock picks seriously. What I did take away from managing a virtual stock portfolio is to, once again, immerse myself within the realm of investing.
I’m Back
The monumental step that led to my comeback to real-money investing was the acknowledgement of a man named Warren Buffett. I researched and researched how this man became one of the wealthiest people and why he held the title as the greatest investor. As the stock market started to tank, his principles and advices mitigated my fear of investing.
During the recession, with stocks at bargain prices, I knew I was buying low and looking to sell high. With everyone pulling money away from their investment accounts and hiding in cash, they were being fearful and it was my time to be greedy. My entire mindset has changed. I made regular contributions to my Roth IRA and invested in mutual funds and ETFs. Whenever the stock market took a huge dive, I would put so more money in it.
Although I began investing again, I was cautious in my ability to select a winning stock. But, after living with my diversified investments for a while, I feel more confident with individual stocks. Sure, no one knows what the future will hold but at the very least, I should be comfortable with my stock picks on a long-term basis.
One major change in my investing outlook is that I’ve ditched the short-term opportunities and look for stocks that I’ll carry with me long into the future.As of now, my Roth IRA portfolio is up and I won’t hesitate to buy in as the market takes the occasional dip. Yes, I think I’m addicted to investing (again) as I’m checking up on my phone regularly – ready to pull the trigger on a buy order.
You Shouldn’t Be Scared Neither
While I went from a coward to a minor addict, those who’ve had the same fear need not live with it forever. Conquering the fear of investing is the same with any other fear we encounter in life. Understand it. Get used to it. Be careful around it.
Here are some of tips from my personal experience:
- Read investing books. My top recommendation would be to read The Intelligent Investor
but it may have technical jargon that could make it difficult to understand. Pick up any general guides to investing that you find on the shelves of your local public library. Once you understand the basics, move up to the harder stuff.
- Learn to read financial statements. Like I said, financial statements contain plenty of information on a company. An accounting course would be great but the more realistic way is to, once again, utilize your library and supplement with information on the Internet.
- Manage a virtual stock portfolio. If you can take it seriously, unlike me, you can really put your investing ideas to good practice.
- Turn on CNBC or Bloomberg. The constant stock market news really put me in the middle of investing. I may not understand everything they talk about but they do keep me up-to-date. Occasionally, I learn something new.
- Start small. My reemergence in the investing world began with $1,000. Slow and steady. It is now valued at nearly $5,000.
- Diversify. And of that $5,000, $4,000 is in mutual funds and ETFs across different indexes. I sleep easy knowing that no single company could lead me to lose all my money.
- Dollar-cost average. I cannot time the market and you most likely can’t neither. So, buying on the way down allows us to purchase cheaper stocks without the risk of losing ton on a single, large purchase.
Having friends who are interested in investing goes a long way to when it comes to your own investments. My friends chat about our thoughts and analyze the chatter in the markets and the economy. I’d suggest refraining from taking and offering stock picks as those situations don’t usually turn out well.
(Photo credit: azrainman)
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