3 Simple Ways to Gain Confidence In Investing
Doing well with money has a little to do with how smart you are and a lot to do with how you behave.
Emotions play a significant role in many things — buying that first home, seeing the birth of your child, investing, etc. That’s just how human beings are wired. Relying on your emotions to guide some of your life decisions may work out pretty well in some situations, however, it often leads to less than ideal situations in investing.
For some investors, especially newer ones, it can be hard to separate the idea of investing from ‘losing everything’. If you’re anxious about the uncertainty of markets, you could make heat-of-the-moment decisions during downturns (like as what we are currently experiencing) that might not be best for your long-term goals. That’s why it’s important to learn about behavioural pitfalls and how they may hinder your progress. In addition, if you feel that your emotions are likely to take over at some point, then applying some systematic steps could help you set your emotions aside when it comes to investing. Here are some tips that can help you build confidence in your investing approach, no matter how the markets are doing.
1. Consider Phasing It Into the Market (Dollar-Cost Averaging)
Are you worried about the markets now? Or maybe you’re thinking that it may go down further, and you’re unsure of when to come in. Dollar-Cost Averaging (DCA) could be a way to help get over that inertia.
Say you have a sum of money to invest — maybe it was an inheritance, savings, or a gift — whether you love risk or shun it, one of the first thoughts you might have is ‘what if I invest all this money now, and the market immediately drops?’ For new investors (or risk averse ones), that potentially means sleepless nights. For experienced investors, that means beating yourself up for not waiting a little bit longer. DCA might bring you some peace of mind regardless of your investing type.
Dollar-Cost Averaging is the act of investing all of your available money over time. How you decide to invest these funds over time is up to you. The typical approach is equal-sized amounts over a specific time period. Since you’re investing the same amount each time, you automatically end up buying more shares when prices are low and fewer shares when prices rise. This can help you avoid that potential buyer’s remorse of investing a lump-sum amount when prices are at their peak.
Bear in mind though, that research does shows that lump sum investing beats dollar cost averaging over time. (see diagram below)
However, to be fair, there are periods where DCA does outperform a lump sum investment over a 2 year timeframe — and that is when the market is undergoing a severe correction such as the dot-com bubble in 2000 and global financial crisis in 2008. These periods can be noted in the diagram below.
Whilst lump sum is the better investment option in majority of the cases, that doesn’t count for anything if you are not able to hold through the entire period. As such, don’t let fear hold you back. If you feel comfortable phasing it into the market, then do so. At least you are starting or adding on to your investment journey to help you hit your goals. As the quote goes “The best time to invest was yesterday. The next best time is today.”
2. Systematise Your Savings
Some investors worry they’re not saving enough to reach their long-term goals or even worse; they have no idea on what to do to get their financial lives on track. You can help alleviate some of that uncertainty by setting your saving process on autopilot. Putting an amount away (no matter how small) every month into your investment accounts does 2 great things for you —automatically helps you save while also helping to invest those savings to maximise it over the long term. We have various programs such as the Million Dollar Builder to help investors save and accumulate their wealth over time. You’ll be taking positive action to stay on track — and that can be a great feeling.
3. Diversify Your Assets
Diversifying your investments is one way to help control risk and help you capture as broad a return as possible. Simply put, it’s putting your eggs in as many baskets as possible — or in this case, putting your money into high-, moderate-, and low-risk investments, all around the world. Your portfolio will still have the growth potential that comes from higher-risk stocks, but you won’t be as vulnerable during market downturns because you’ll ideally also hold safer investments like bonds and cash-like instruments. The breakdown of stocks, bonds, and cash in your portfolio determines how much risk you’d be able to take on when you invest; you have the freedom and flexibility to choose a mix that feels right for your life.
Diversification does not mean holding 10 or 20 stocks or several different funds. Your portfolio itself should be allocated in a globally diversified manner with thousands of stocks and bonds. This way, while your portfolio may not always be at the top of the charts in terms of performance, you definitely won’t be at the bottom, and neither would you lose all your money. In addition, you won’t need to stress over what to buy and sell every other year or crisis. The chart below shows how a diversified portfolio (circled in yellow) performs over the last 2 decades — it’s always somewhere in the middle and chugging along just fine.
Whether you are just starting out or are an experienced investor, these tried and tested methods will definitely help you reduce your worries over the different investment climates and also enhance your investing experience. Over time, you will gain more confidence over what the markets are able to offer you and you would feel much more comfortable when looking and even discussing about investments. However, if what is happening in the world today and the impact on markets still worries you, we are here to help guide you through it.
