Investing can be dangerous yet profitable endeavor. Many people have
been burnt and decide not to ever invest again. This is the primary
fear for investing in anything. They may give you excuse such as 'I
don't have enough money' or 'I don't know where to invest'. But the
number one fear is always the fear of losing money. If a novice
investor knows that he won't lose money, he must have used all means
necessary (such as loan) to buy as much investment opportunity possible.
Investing here can mean a lot of things from buying gold coin to real
estate. However, common stock is the most popular form of investing
since more than 50% of the US household invest in it. There are several
ways of how to reduce your fear of investing in common stock.
Get Educated. When you know more about something, you are more
certain of your outcome. When you know how to calculate the fair value
of a common stock, you will know your expected return of investment.
Remember that the less uncertainty you have, the less risk you
undertake. You will also know more about the downside risk of your
investment. If a common stock has $ 3 per share of positive net cash,
is profitable and is currently trading at $ 5 per share, then you know
that it won't trade at below $ 3 per share for a long period of time.
Your maximum possible risk here is 40% of your original investment.
Start Small. When you begin your investing journey, you have a
lot of unknowns. Less education means more unknown which means greater
risk. How small should you start? As much money that you can afford to
lose. If you still have no idea, then how about $ 1 a day? One dollar a
day will give you $ 500,000 after fifty years of investing with 10.5 %
return. Even if you have $ 500,000 right now, it is better for you to
start small if you are a novice investor.
Pay Yourself First. By this, it does not mean that investors use
their money to buy unnecessary stuff. Pay Yourself First means that you
find investment that can pay you first as investors. What investment
can pay you first? One thing that comes to mind is buying a common
stock that historically has a steady or increasing dividends. There are
one more way to pay yourself first by selling covered call options. For
novice investors, however, I suggest we put this subject off until you
get really really comfortable with investing in common stock.
Learn From Your Mistake. Once you begin investing, the fear of
losing money is always there. The best way to learn is from your own
mistake. But to hasten your learning curve, we have compiled a list of
15 common investing pitfalls that is frequently committed by novice
investors.
Will you be fear-free after reading this column? The answer is no. Fear
is always there because of uncertainty. Successful investing is about
predicting the future which is uncertain. Even investing in your
money-market account is uncertain. It involves some small risk. The
risk might be inflation being higher than the interest rate offered.
There is also uncertainty regarding the direction of interest rate.
Interest rate used to be in the high single digits during the 1980s.
Look where it is now.
We live in uncertain world. Instead of hiding behind the wall, we need
to embrace it and educate ourselves to reduce the uncertainty. Doing
this will in effect increase our investment return beyond the rate of
inflation.
