I remember once chatting with a fear counsellor. This person helps people overcome their irrational phobias. As the counsellor explained to me, on its own, fear is not a huge problem – until it impinges on our daily lives and starts to cause us problems.
For instance, the fear of sustaining serious injury is what stops most of us from running across a busy road. In that situation, fear is undoubtedly a good thing – it will prevent us from getting knocked down by a car because of our recklessness.
However, when a phobia stops us from leaving our homes because we are worried that something bad could happen when we are outside our house, then that is when it becomes irrational. That is when we need to seek professional help.
Running across an expressway
But what does this have to do with investing? Some people are afraid to invest in the stock market. They believe investing in shares is risky, perhaps almost as risky as running across a three-lane expressway during the rush hour.
They are right up to a point. Investing in shares is definitely not risk-free. We could buy a share in the morning only to find that it has lost 10 per cent of its value by the afternoon. Of course, it could just as easily rise by 10 per cent, too. But it is probably the fear of losing money in the short term that stops some people from investing.
But it is more than just fear. There is scientific evidence that shows that investors feel the pain of a loss twice as much as the joy of an equivalent gain. In other words, we are twice as affected by the loss of $100 than the gain of the same amount of money.
Consequently, some people would much rather sit on a pile of cash, happy in the knowledge that their money is safe. However, “safe” in this situation is not only misguided, it could also be a costly mistake, too. Cash is an awful asset to have in abundance because it is slowly being eroded by inflation.
The terrible effect of inflation
Currently, inflation in Singapore is around 6.6 per cent. Therefore, S$1,000 today might only be worth S$934 in a year’s time, if inflation carries on at this rate for the next 12 months. Project that forward 10 years, and the S$1,000 might only be worth S$505 by 2033. That is the danger of playing it too safe and doing nothing with our cash.
Therefore, to ensure that our savings are not eroded by inflation, we will need to take on some risk. That is fine if we are comfortable with investing in risk assets such as the stock market. But what about those who are afraid to assume risk? How can they overcome their fear, which for them is real?
After all, who wants to buy a share in the morning only to find that it is worth less in the afternoon? It can happen. That is because unlike money in a savings account, or even left under a mattress, share prices can be highly volatile. There is no telling what can happen to the price of a share after we have bought it.
Invest in what we know
One way to overcome our fear of the stock market is to invest in companies that produce the things and deliver the services that we know and trust. For instance, consider our favourite supermarket or the place we are most likely to meet up with friends for a cup of coffee.
Dig into the financials of those companies which may include our telecommunications provider or our preferred bank. Are they making money, and if so, then why not consider investing in them? If they pay a dividend, then all the better. We are rewarded with cash simply because we own their shares.
Investing in what we know can be a good way to overcome fear. After all, if we are happy to put the food that we buy from our favourite supermarket in our mouths, then what’s to stop us from putting its shares in our portfolio, too?
A scary moment
While investing in the stock market can be scary at first, it should pale in comparison to the fear of running out of money when we retire. At some point in our working lives, we may either decide to stop working or perhaps the company that we work for has decided that it is time for us to stop working.
That doesn’t necessarily have to be a scary moment in our lives, provided we have prepared for that day in advance. It should be a moment to celebrate the years of hard work that we have put into being able to enjoy our days in the sun.
We can only do that if we have put away enough money to take advantage of our golden years. We can’t easily do that if we let fear force us to play it safe, and let inflation erode our nest eggs.
Note: An earlier version of this article appeared in The Business Times.
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Disclosure: David Kuo does not own shares in any of the companies mentioned.