How to Overcome Your Fears in Stock Market Investing

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Wall StreetOne of the common stories from the recent recession is how shell shocked younger investors are. I’m not surprised because it seems like there is bad news every week and the market makes one hundred and two hundred points moves like it was nothing. When you combine that with a lowered confidence in the economy, with people afraid they’ll join the ranks of the unemployed, it’s obvious why younger investors feel this way. It’s not much different than the frugality that came out of the Great Depression – we are a product of our times.

Despite these fears, the stock market is the easiest way for someone to invest their savings. When stock trades are only a few dollars and there’s a very liquid market, it simply can’t be beat. The question is whether you even want to play the game and I argue you should dip your toe in… and here’s how.

Contribute to 401(k)

No matter how scared you are, the one thing that most young people are comfortable with is investing through a 401(k). First, you get the tax benefits. Every dollar you contribute is tax deductible and you won’t pay taxes on it until you start taking disbursements in retirement. Depending on your tax bracket, that reduces how much it “costs” for you to invest and your initial investment is that much larger. Next, there’s the company match, if your company offers one. It’s like giving yourself a mini-raise.

Finally, and what I consider the biggest reason most people are comfortable, you can’t touch it for a long long time. This is money you’ve put away in a time capsule. It’s not part of your immediate financial plans and so you know that you can let time work for you. So when you see that the market has dropped, you aren’t as concerned because it’s not as immediate.

Be OK With Saving Later

We’ve all seen the charts – save now and the compounded returns will make you rich in a few decades. That’s true but the rate of return from the stock market isn’t a nice smooth upward trending line. It’s jagged with lots of ups and downs and while your investments will probably appreciate over several decades, it’ll do a lot of winning and losing in those intervening years. While you’re younger, chances are you will need that money more often and so it doesn’t make sense to start investing with money you might need to buy a house or a car. So despite the fantastic charts, it’s OK to wait a few years before getting more involved than through a 401(k).

Invest in Dividends

If you do eventually want to dip into stocks, I recommend checking out some dividend stocks. These are usually at older blue chip companies with low betas (a measurement of volatility compared to the overall market), so they don’t gyrate as much, and the dividend offers you some income and insurance against the gyrations of the market. I personally like starting with the Dividend Aristocrats, though I recommend reading about dividend investing in greater detail before you start picking stocks.

It’s important that you do whatever will let you sleep at night. For some, it’s avoiding the stock market entirely and knowing that their money is in a certificate of deposit that will not lose value. For others, it’s owning a few hundred dollars of a dividend company or maybe a hot new startup. Whatever it is, it’s important that you make a decision that you’re comfortable with. Your capital should be working for you, not keeping you up worrying about it.

(Photo: epicharmus)

{ 5 comments, please add your thoughts now! }

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5 Responses to “How to Overcome Your Fears in Stock Market Investing”

  1. DIY Investor says:

    Excellent post. Young people need to get into the stock market. Get in, contribute on a regular basis and pray that it drops 50%. That way you’ll be getting stocks on sale.
    Instead of spending a lot of time picking individual stocks I would recommend a dividend ETF like DVY. If your 401(k) doesn’t offer one ask your HR plan administrator if they can add one.
    If you open a Roth with Schwab you can buy their dividend ETF at zero commission. A great way to start investing IMHO!

  2. Penny says:

    Thanks for posting this. I’m really nervous about investing, but I also feel like it’s a really important part of being financially prepared, so I’m trying to ready myself. I’ve set myself up with a virtual stock market game at Market Watch to help me get adjusted to the idea of money going up and down without me doing anything. I’m hoping to feel more ready for it by the time I graduate.

  3. Much of the fear comes from constantly reading about the market. While being ignorant of what’s going on is now answer, there’s also little reason to check the market daily to see how you’re doing. Invest your money regularly and go about your day!

  4. money says:

    Stocks have been flat for the past decade. You would have made more money with a 1% CD than with stocks in the last 10 years. Better to get rid of all debt before jumping into stocks

  5. Scott says:

    A 401(k) is great for passively investing in the stock market. You set up your allocation through your employer and forget about it. It’s up to you on whether or not you want to even look at the statements. An IRA, unless you set up a similar automatic system, requires more involvement and more tolerance to risk.

    You can protect yourself somewhat in the stock market by having a plan and being realistic in your expectations. Look for diversification through ETFs, and protect yourself from the downside by buying securities which pay dividends. Think about asset allocation by mixing stocks and bonds and don’t fall into the trap of chasing trends or following the crowd.

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