Investing Fear Factors

March 18, 2014

Fear Factors and Fear Busters

Yesterday I wrote about how investing fear factors prevent a number of people from investing or investing as much money as they should. Whenever I see that clients have an inordinate amount of cash, I immediately start to assess what is causing this behavior, and I try to help them through it. From what I have seen in my practice, there are many fear factors that lead to asset allocation mismatches. Here are a few fears that my clients have shared and some of the ways I help them overcome those fears.

Fear Factor – “I will lose all of my money.”

After “losing” half of what you had invested in 2008 and 2009, it is understandable to think that you could lose your wealth through investing. Of all of the fears, I think this is probably the most rational one as we have a recent market experience to confirm this.

Fear Buster – Understanding the difference between unrealized and realized losses

When you log into your investment account on any given day, you will see that your portfolio is either “up” (green) or “down” (red). What you are looking at are your unrealized losses or gains. I have many clients who look at this and think they have lost money if their account is in the red. The unrealized losses are just a snapshot and an indication of what your account would look like should you sell. You only “lose” money when you sell what you own at those prices. If you choose to sell, then it becomes a “realized” loss, until then, it is as though it has not yet happened. If you purchased shares of a company, or an ETF or a mutual fund, you still own the same amount of shares that you purchased on the day you purchased them. No one took that away from you.

For my clients, when we look at investing money, we are looking at money that is not ear marked for anything for greater than a year. Given this time horizon, they should not be looking at the account on a daily basis, rather every few months. My clients who look at their portfolios regularly give themselves whiplash from the red and green fluctuations. But they know that when they see red, they should take a deep breath and remember that they don’t need the money today and they are able to move on with less stress.

Fear Factor – “I don’t have the money to invest.”

Even my clients who have a bunch of cash in their checking and savings accounts tell me they don’t have money to invest. This is because they like the “safety” of having cash on hand. Or for those who don’t think that they have any money, they don’t realize that you can open brokerage or retirement accounts for as little as $1,000.

Fear Buster – Money classification

One of the first things that I help clients understand is that their assets should not be viewed as one bucket of money but rather three. The first is their emergency money or funds they may need in the next 6-8 months. On the complete opposite end is their retirement savings, and in the middle is what I call the “life” bucket because this is the money they will use to fund most of what they want out of life after basic necessities but before retirement. The emergency bucket should be kept in cash, but everything after that should be invested with varying levels of “risk.”

When I talk to clients about investing, I am not talking about investing their food or rent money. I am talking about “longer term” money that should be working harder for them. Many of my clients think that they need more money in the emergency bucket; however, if you are investing in widely traded investments like stocks, bonds, ETFs and mutual funds, you have the ability to sell these and get cash within a few days. I have some clients who even invest a portion of their “emergency” bucket because they know that their investments aren’t locked up in something that would take them months to access. Identifying your three buckets of money really gives better clarity to how much money you have to invest and how you should invest it.

Fear Factor – “The stock market is not safe.”

Most of my clients who would say this would probably point to an image* like this one below as their “evidence” to support their case. (I added their emotions during this time period to the graph.)

Investing fear factors


Fear Buster – Understand risks and take safety precautions

I think the image above is the absolute perfect one to describe investing. When you invest, the experience is definitely akin to a rollercoaster ride, there are always risks and always ups and downs. I am sure that the 15% plunge in 19 days in 2012 would give even someone with the strongest stomach reason to feel ill. As someone who hates roller coasters, I can absolutely understand this feeling of dread, and the cure for this fear is similar to what I do when I go on roller coasters, I make sure I understand what I am getting on. I think a problem people have when they are investing is that they don’t think about it as a roller coaster ride, they think it should be more like a bike ride. And when they experience uncomfortable bumps, they want to jump off. I make sure that my clients understand the roller coaster and know that there will be bumps along the way, but jumping off, just as it would be a bad move in the amusement park is a bad move where investing in concerned. That 15% plunge in 2012 was painful, but six months later, the market “recovered” and you were thankful you didn’t jump.

Just like there are safety precautions in amusement parks, you need to take safety precautions when you get on the investment roller coaster.
  1. Don’t put all your eggs in one basket – i.e. make sure you are diversified. You will have a much more wild ride if you just invest in Apple vs. an ETF of tech companies or better yet a broad market ETF.
  2. Make sure you are only investing money that you won’t need in the immediate future.
  3. Invest in multiple assets not just stocks (i.e. stocks, bonds, real estate, etc.) this diverse asset allocation will smooth out some of those bumps on the ride.

Fear Factor – “I don’t understand the markets.”

I understand this fear more than any other, as it was my biggest fear factor. As I mentioned yesterday, it was so big, that I decided to make a career change in part because of it. I can assure you, though; you do not need to make a career in the financial services sector to understand the markets.

Fear Buster – Discover amazing tools and resources

Twenty years ago, most people utilized a financial advisor because it was very difficult to get information on investments. Today we have almost the reverse problem where we have so much information available that it is difficult to process. I am going to share with you some resources that I find helpful; however, I think it is important to find someone or something that makes sense to you and stick with it. Here are some investment resources that I would suggest.

  1. Financial Service Providers – If you are going to invest your money with them, you may as well take advantage of the resources they provide to you. E*Trade (affiliate link) is an example of a great resource. First of all, I love the fact that their motto is “Learn How to Invest with Confidence.” Like other similar sites, you can trade and do your own research; however, they have advisors available via phone to talk to you about your financial choices. If you think you want to invest in ETFs, but don’t know which one, pick up the phone and ask. You should not have to sit at your computer for hours trying to figure it out by yourself. They also have an area specifically dedicated to education and helping you make informed decisions. Most providers that you would consider for self-investing (i.e. Vanguard, USAA, FidelityScottrade) will have similar resources at no cost to you (other than having your account and assets with them) and you should take advantage of them.
  2. Bloggers – There are so many amazing resources provided by the personal finance blogging space. What I love about PF bloggers is that they take the time and energy to explain seemingly complex situations by breaking them down so we can all understand them better. I have something fun planned in the future to help with investments. Until then, here are some blogs that I love for great investing info/advice.
    1. Frugal Rules
    2. Modest Money
    3. Mom and Dad Money

  3. General Financial Websites – If you are still looking for some other great resources to get comfortable with investing, here are some general sites that I think have a wealth of information that is easy to understand.
    1. Investopedia
    2. Better Investing
    3. Market Watch

Yesterday I shared the reactions of clients when I first tell them we are going to invest more of their money. Here are the reactions of clients after they have overcome their fears and invested more.

elf_joytumblr_lm11bt4OaK1qe6xr2 dwight_yes stanley2 the_carlton


Have you suffered any of these fear factors? How did you overcome them? what are tips you share with others to alleviate their fears?

*Image Source Yahoo Finance

*Gif source



Shannon @ Financially Blonde
Shannon @ Financially Blonde

Shannon is a financial planner who left a "traditional" financial services firm to start her own company, NextGen Financial, because she felt traditional financial services firms did not have the tools or resources to help people in their 20s and 30s who are starting out and trying to build assets while also managing debt. She realized that the key to long term personal financial success is a commitment to financial fitness and making smart financial choices. Through this blog, her books and her company, Shannon is committed to making financial fitness fun, easy and accessible for others.

  • Thanks for the shout out Shannon, I really appreciate it! I’ve seen many of these fears as well, and some I get more than others. The one I had to overcome was the knowledge aspect. It did hold me back for awhile, but decided that I wasn’t going to allow fear hold me back from not growing my wealth. I think a good area to start is simply by starting small and teaching yourself that aspect. I’ve seen that many will find that investing really isn’t that difficult if they just start out simple. One thing I always recommend is paper trading, I still do it myself and it’s a great way to get your feet wet without losing any real money.
    John S @ Frugal Rules recently posted…It’s Hard to Be the Frugal OneMy Profile

    • Absolutely John! I wish I had thought about blogs years ago as a source of knowledge and maybe I would not have been so freaked out. And you are right, you should absolutely start out small if you are scared. When I move people out of cash, I always prepare them and tell them we are not doing it in one day. It is a process and not an overnight one.

  • Solid advice! I love that you started out by pointing out the differences between realized and unrealized losses. It can be hard to grasp when your emotions are running wild, but it’s so true. Luckily the hubs and I are young so, although it feels uncomfortable when the market drops, we shrug it off and know we have many more years to make it back :-)
    Dee @ Color Me Frugal recently posted…6 Things You Need Before You Get a PetMy Profile

    • Thanks! I always have to have the unrealized/realized chat with people, even clients I have told multiple times. It is just an emotional experience to see red all over the place. If they made down colors purple, my life would be a lot easier. :-) But it is also a reason why I counsel to not look everyday. If you don’t need the money to pay for food and shelter, then don’t worry about it. Check your bank account everyday instead!

  • Great advice. I can relate to the not understanding the market issue. I think I had a general and basic understanding when I first started investing 3 years ago. However, I was totally overwhelmed with all the different types of investments and all of the information/data provided about each investment. We ultimately ended up investing in some index mutual funds which have done well. Now that I’ve learned more, we invest in ETF’s. Now that we made the initial jump into investing I’ve really enjoyed learning more about the market and available investments. Really interesting stuff!

    • There is absolutely a ton of information out there and it is definitely difficult to process. I remember thinking years ago that I should invest in an ETF (not really knowing what it was) going to Fidelity to buy one and finding out there were hundreds with different names and I had no idea what it represented. Knowledge definitely helped me manage through the noise better.

  • Awesome fear busting advice! I have to admit, I was scared of investing at first. My parents didn’t have much experience with it, and none of my friends are interested in it, so I had to step forward on my own. I knew starting early would be advantageous, so I went ahead and just opened a simple Roth IRA with Vanguard last month. Since I’m still focusing on paying my student loans, I figured I’ll let this initial amount grow for now, and then once the loans are paid off, I’ll put the money I used for debt toward my IRA. I would like to get more into investing after that, and it’s on my list to learn about later in the year.
    E.M. recently posted…Two Sides: Debt RepaymentMy Profile

    • You were definitely going into unchartered territory given the fact that your parents didn’t go there before you. That takes big guts! Good for you! Retirement accounts are good “starter” points for investing because you have the most time and most patience with them. Your next step will be investing “shorter” term funds. But until then, baby steps. :-)

  • Great post and very thorough. I think sometimes it’s okay to have security in having cash on hand, but I think you are referencing people who have years worth of expenses in cash (i.e. if they lost all income they could survive for years simply on the cash in their savings account). I absolutely love my 401k because I hardly ever check it. When I do, I have no emotional reaction to it. I know this account is going to be sitting there for 35 years or so and the only thing that really matters is that I keep contributing to it.
    DC @ Young Adult Money recently posted…4 Things You Need to Do To Become Self EmployedMy Profile

    • Yes, cash on hand is an absolute must, but what I people need to balance is too much security vs. missed investment opportunity. It’s funny because most people think the stock market is a 5+ year investment, yet stock market experts all claim that the market moves in two year intervals. Either way, I am a big fan of having less in cash (especially when it doesn’t “work” for you) and more in hard working investments even if they are scary.

  • Love the graph with the emoticons. :) I agree with everything and I think it’s incredibly important for people to understand the difference between realized and unrealized gains and losses. So many people have knee-jerk reactions tot he stock market – both when it’s performing good or bad. There can be a lot of fear around investing but when they take the time to really understand what is behind those fears, they often investing isn’t as scary as they thought.
    Shannon @ The Heavy Purse recently posted…Myth: Kids Don’t Care about MoneyMy Profile

    • Ha! I think that anyone who has had to hold their client’s hand while riding the roller coaster can appreciate the emoticons. :-) And it is so funny because people’s emotions are exactly the opposite of sound trading advice (i.e. buy low and sell high). The more we can take the emotion out of the ride, the better we will be financially and emotionally. :-)

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  • I love the graph emotions, and love the GIFs. Honestly, all it should really take for anyone to overcome their fear is just ten minutes of research. People want to invest for retirement, which is anywhere from 40 to 10 years away, but they worry about the day to day fluctuations of the market. To be honest, when I invest, I consider it as money spent. I don’t look at the day to day movements, and since I do my research, I’m comfortable with my holdings. Oh, and don’t even get me started on the “I don’t have money to invest” crowd. Even if a 25 year old invested $100 a month, it would be huge. Everyone has spare money they can find to invest, it’s just a lot of people would rather spend it on something else…
    Ryan @ Impersonal Finance recently posted…my career as a job hopperMy Profile

    • Ha! I know you definitely do not need much money to invest, and I agree an investment account is much better than a car or tv. And I agree, with the amount of resources available, it should not take much time to research and get comfortable, but some of those other fears are probably coming into play.

  • I love it, now this is a million dollar blog. Fear Factor – “I don’t understand the markets.” this is me. To resolve this fear, i attended lots of financial seminars. Now i have stocks that have grown 30%, its a start. My tips to others is the same. Don’t shut the door about investments, instead gain more information and make an informed decision on what type of investment is for you.
    Jeff @Project Ikonz recently posted…Need a loan?My Profile

    • Thanks Jeff! Yes, sometimes the best way to combat the fear is just to face it head on like you did. It is awesome that you have had success with your portfolio and what is important to remember is that even if it goes down, you need to continue to feel good about what you did because it will likely go up again.

  • I have all of those fears but I still invest anyway. I’m still fairly young (34) So I fully expect the market to crash several times before I retire.
    Holly@ClubThrifty recently posted…An Open Letter to ComcastMy Profile

    • Some of these fears creep up on me from time to time. Every time I suggest investments to clients, I think I might throw up because I feel personally responsible for their successes. But yes, if you are in this for the long haul (i.e. more than 2+ years), then you just have to get over it and move forward.

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  • I tend to agree that some of your emergency fund does not have to be in cash once you get it to a big enough number. We have about 10K in cash and 50K+ in investments (Canadian TFSA which I believe is similar to US Roth). Do you think it’s okay to count these investments as part of our e-fund, or should we save additional cash and invest that above our TFSA? Keep in mind, saving that additional cash will impact our debt repayment. Appreciate your thoughts since you seem to have it going on over here. ;-)
    DEBt DEBs recently posted…What’s your daily money routine?My Profile

    • I am a big fan of the two prong approach to financial health which is fighting debt but also building assets. Only fighting debt can become an exhausting and thankless project, while seeing assets build in your bank account is very motivating and stress relieving. Having assets helps you not get into further debt troubles. I don’t typically view retirement savings as part of e-funds because accessing them usually comes with penalties and fees that deteriorate any of the investment returns you would have gotten. When you are contemplating one dollar going to debt or savings, think about the cost benefit analysis of that dollar. If your debt is at 6%, but you could earn 8% investing it, then it might make sense to invest it. Truthfully, it is all a personal choice as far as which path you want to take to financial health and freedom, but as long as you are on the path, you are a step ahead of most. :-)

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  • Great advice.

    Funny. I tend to have emoticons go the other way. When the market is down, #1 I know it will recover and then some, so I don’t sell anything and #2 I always feel that a correction means a sale and I invest more. Getting there took me a while though.

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