It took years of earning money in my 20s before I started investing in stocks. Why the delay? It largely boiled down to a lack of knowledge and a substantial amount of fear on my part.
Back then, I certainly knew the basics of investing. And I understood that while investing offered the potential for reward, it wasn't without risk.
These days, however, I not only invest consistently, but I also don't sweat it when the stock market takes a beating or my personal portfolio value declines. In fact, I don't even check my portfolio all that often. Maybe once a month, whereas when I first started investing, I used to check obsessively every day.
How did I get over my fear? It was a process. But these things helped.
1. Having an emergency fund
I knew early on that you don't lose money in the stock market unless you actually go out and sell off investments when they're down. And thankfully, I've set myself up so I shouldn't have to do that unless a truly extreme situation happens to strike.
Since my 20s, I've made a point to maintain a healthy emergency fund, and through the years, I've added to that account as my circumstances changed. When I bought a house, I padded my savings in case home repairs were to pop up. When I had kids, I put a little more money in there as well.
These days, I have enough money in emergency savings to cover roughly a year's worth of bills. Some might say that's too much to have in cash, and for many people, six months' worth of living expenses in savings is more than sufficient. But having a boosted emergency fund not only gives me peace of mind, but also lets me invest more confidently, knowing I shouldn't have to tap my brokerage account if I need money in a pinch.
2. Having a strategy
The first few stocks I bought were companies whose products or services I was familiar with. That's not a bad starting point, but using and liking a product doesn't make the company behind it a solid investment. Since then, however, I've read up on how to choose quality stocks and have assembled a portfolio based on certain criteria:
- Diversification -- I like a nice mix of stocks from various segments of the market.
- Growth potential -- I like companies that haven't already peaked, but are likely to keep doing better.
- Competitive advantage -- I tend to favor companies that have at least one specific thing they're doing right that others have failed to emulate.
Having a strategy makes me feel better about buying stocks because I know I'm making sound decisions. That doesn't mean my portfolio can't lose value. It's possible that a stock I have full faith in will plummet following a quarter of poor earnings. But I'm more comfortable investing knowing that I'm sticking to a plan.
3. Having stock market data
When you're new to investing, the idea of a stock market crash can seem scary, the same way turbulence can freak you out when it's your first time flying on an airplane. But once you realize that both events are normal, it takes the edge off.
A big thing that helped me get comfortable investing was reading up on the stock market's history. It turns out market downturns are extremely common. The S&P 500 index has experienced 26 bear markets since 1928. That may seem like a lot, but it's also enjoyed 27 bull markets. Not only that, but the average length of a bear market has been 289 days, whereas the average bull market has lasted 973 days.
And here's another point that I know puts my mind at ease: Though stocks lose an average of 36% during a bear market, they gain an average of 112% during a bull market. Since I'm taking a long-term approach to investing (there are stocks in my portfolio I've already held for well over a decade and plan to hang on to for several more), I'm likely to come out ahead despite the stock market's tendency to go through periods of decline or instability.
Investing can be intimidating when you're first starting out. But there are steps you can take to get over that fear. Build emergency savings so you can worry less about your portfolio tanking right when you need money, develop a strategy that works for you, and read up on stock market crashes so you'll realize they're not the terrifying one-off events you might think they are. There's lots to be gained by investing consistently throughout your lifetime, and once you get over your fears, you, too, can start enjoying that upside.