Understand and Reduce Your Investing Anxiety

Paper Asset Investing Series: Post #3

I’m doing a paper asset investing blog post series, if you haven’t read the other posts, be sure to here:

Post #2: The Most Important Thing To Know Before You Ever Start Investing

Post #1: Top 5 Investing Terms to Help Beginner Investors Become Smarter Investors

 

Ever thought you should start investing, but just couldn’t pull the trigger? I’m sure you’ve had anxiety around investing. Who doesn’t? It’s still scary even for those who have been investing for awhile.

It’s hard to press the ‘buy’ button because what if the price drops significantly right after or you realize you could have done better with a different investment?

It is nerve wracking to put your money into something you’re not sure will get a high return or a return at all. Or the fact you won’t have access to your money right away if you needed it for an emergency. I get it.

It’s normal to have anxiety around investing. There’s no sure thing out there, anything could happen at any time.

Understanding more about that anxiety can help though.

Let’s try to understand where that anxiety and fear is coming from and what affects it. By understanding the basis of the anxiety it can help you improve your limitations or fears around investing.

Let’s talk about your risk tolerance.

What is risk tolerance?

What exactly is risk tolerance?

Risk tolerance is a psychological trait that is actually genetically based.

Your risk tolerance is basically how you feel about risk along with the degree of anxiety you feel when risk is present. Risk tolerance can be defined as:

“The extent to which someone chooses to risk experiencing a LESS favorable outcome in the pursuit of a MORE favorable outcome.”

For example, would you risk $100 to win $1,000? Or $1,000 to win $5,000? Everyone varies in their risk tolerance and there is not one “perfect” balance.

If you’re having a higher degree of anxiety around investing it could be attributed to a lower risk tolerance.

An aggressive investor, or one with a high risk tolerance, is willing to risk losing money to receive potentially better results. A conservative investor, or one with a low risk tolerance, favors investments that maintain her original investment.

However, by increasing your education, income and wealth, risk tolerance tends to increase.

What affects risk tolerance?

Risk tolerance is affected by the perception of the risk. For example, making purchases online over 15 years ago would have been perceived as risky, but it is less so today. It seems to be more of the norm because the perceived risk of what could happen (or not happen) by ordering online has decreased.

The perception of the risk has changed over time.

The idea of perception is important, especially in investing. As you gain more knowledge about investments – for example, how stocks are traded and the ease or difficulty of liquidating an investment (selling it for cash) – you are likely to consider stock investments to have less risk than you thought before purchasing your first stock.

As a consequence, your anxiety when investing is less intense, even though your risk tolerance remains unchanged because your perception of the risk has evolved.

It’s no longer as risky as you thought.

Continuing to gain more knowledge about investing and making an investment plan can help you overcome your limitations and fear around investing.

Is it important to know your risk tolerance?

Yes, it is important to know your risk tolerance. By understanding your risk tolerance, you can avoid investments which are more likely to make you anxious.

Generally, you should never own an asset which keeps you from sleeping at night.

Anxiety stimulates fear which activates emotional responses, instead of logical responses, to the stressor. During periods of financial uncertainty, investors who can keep their cool and follow an analytical decision process invariably come out ahead.

Although it is good to understand your risk tolerance, keep in mind your own behavior is difficult to predict in advance.

Many investors make the mistake of believing they are “aggressive,” but are really “moderate.” When the stock portion (usually higher risk) of their investment decreases dramatically in price, they may sell the stocks immediately even if their previously calculated risk tolerance suggested they would “do nothing.”

Remember to take into account how you think you will actually respond when your investments may not be performing well. It may be harder to determine, but it’s something to consider.

Summary

Understanding your risk tolerance and ways you can increase it is critical to becoming a great investor. If you remain stuck in your fears you won’t be able to even get started investing.

Also, by decreasing your perception of the risk, you’ll be able to reduce your anxiety and limitations around investing.

Start by learning one more thing about investing today. There’s plenty of posts on my site about investing and plenty elsewhere to get you started. Keep learning to help reduce the anxiety. The more you understand about investing the less scary it will become.

Do you feel like you’re an aggressive investor, moderate or a conservative investor? Share in the comments below!

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