Learning how to gain confidence in investing allows you to make the most of your money. You can increase your income rather than reduce it by letting money sit in a current account. Currently, many people are unable to invest because they do not know what to do, do not have the confidence to make decisions or do not like risk.
This is sad because, if you are like that, you are leaving money on the table. Your issues are easy to solve or are not even issues at all. Learn how to gain confidence and make the most of your money.
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How to gain confidence in investing for the risk averse
Why you should invest
Every year, prices rise. This happens wherever you are and whatever you do. This rise in prices means that you need more money to buy the same product. An apple may cost £1 in one year, and £1.02 in the next year. This does not seem like a big increase but if you apply this to all products you buy in a year, the extra costs add up quickly.
Not investing means losing money
Rising prices mean that your money loses in value as you need to spend more on a purchase. The average inflation rate is 2%, meaning you lose 2% of your money per year.
If your money sits in a current account, you may not earn interest on it. And if you do, your interest rate is very low (unless you signed-up during a promotion). Equally, savings accounts offered by banks will give you a very low interest, even if you have an ISA. You will gain less than 2% in interest with these methods and, therefore, lose money.
The reason that you lose money is that the interest in these types of accounts is not high enough to ward off inflation. To do so, you would need to earn at least 2% interest. Banks, of course, know this but if they would pay you interest higher than the inflation rate, they would be losing money.
Therefore, you have to invest to not lose money.
Why risk-averse individuals win in investing
I also used to be without confidence in my investment skills and feared the risk associated with investing. When I started to read about personal finance, I learned one thing that surprised me: Being risk averse is actually a strong point.
This is because being risk averse, or cautious, means that you
- Are less likely to become involved with high-risk investments that people should stay away from anyway
- Will assess your investment and your decisions more critically
- Are less likely to gamble with your investments
You may feel like you are at a disadvantage because most successful investors we hear of have taken risks in one way or another. And it may be true that you can make more money with risky investments–but you are also much more likely to lose your money.
Do not let fear stop you from investing. Being risk averse is a strong point rather than a weakness.
Why lack of confidence in investing should not stop you
Saying things like “I do not know how to invest” or “investing money is too difficult for me” are excuses. With time, almost anything can be learned. Passing a university exam seems impossible, but after a year of studying, most students actually pass. This is because they have spent time with the subject and worked to understand it.
Investing is no different. Except that you do not have to spend years studying. You do not have to know everything, but you have to know the right things.
You can start by finding out more about the available asset classes and visit your local library for books about investing. I recommend starting with Tim Hale’s Smarter Investing: Simpler Decisions for Better Results.
How to start investing
Beginner investors often do not know what to do. Hopefully, after reading about the topic, you will have a better idea. If not, here are some easy ways to start.
Start with risk-free investments
Yes, contrary to what I wrote above, there are ways to invest that are risk free. However, this only works for a very limited amount of money and time. Some banks offer high-interest (up to 5%) current accounts as part of a promotion. However, the interested rate is usually limited to a year at most. This means you will beat inflation and make money with your savings.
Investing in property
Property is an asset class that even the most risk-averse people become involved with. Even if you do not like the risk of investing and lack confidence, you may already be an investor if you own a house.
Interestingly, many people do not even know that there is a risk associated with owning property. For example, you could lose your job, meaning you could not pay the mortgage anymore. Thus, you may be forced to sell your house. If this happens during a recession or your area has become less desirable, you may not be able to pay off the mortgage with the selling profit.
The above scenario is (thankfully) unlikely to happen but illustrates that your investments may already be at risk, even though you do not think of yourself as an investor.
If you are already familiar with properties and own a house/flat, you could think about buying a buy-to-let property and make money from this. However, for most people, investing in the stock market is more appropriate.
Investing in the stock market
There are many options for investing in the stock market. You can simply buy individual stocks or pay a fund manager to do the work for you. However, these can be high-risk and are, therefore, unsuitable for risk-averse investors.
Instead, you may prefer index funds. Index funds mean investing in a whole lot of stocks which reduces the risk. For example, company A may grow in a given year, company C may remain stable, and company C may incur losses.
The risk-seeking investor may choose A, B or C (individual stocks), meaning many will lose their money. The smart and risk-averse investor will choose A, B, and C (index tracker). As the economy is growing over time, there are more company As than Cs and overall, the smart and risk-averse investor will profit.
Index tracker are a low-risk way to become involved in the stock market. If you are scared, you can start by investing a small amount and watch it grow over time.
Finding the right index tracker
Monevator has a good list of all low-cost index trackers. Note that not all index trackers are the same as they invest in different areas. Not all of them may be low risk.
I am not a financial advisor and you absolutely have to do your own research, but a commonly recommended beginner fund is the Vanguard FTSE Global All Cap Index Fund.
HOW TO GAIN CONFIDENCE IN INVESTING FOR THE RISK AVERSE summary
Investing may seem scary and if you are lacking confidence and are fearing the risk, you are not alone. However, confidence can be learned and being risk averse can be turned into a strong point.
You will gain confidence in investing by learning more about the subject through reading and looking around. Everyone has the potential to be an investor.
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