Tackle Anxiety & Risk Aversion
Investing can cause twice as much anxiety on an emotional level than the sense of benefit from making money. This is how risk aversion works & the idea you could be wrong is often paralysing. Learn tricks to overcome investment anxiety, because doing nothing with your money is even more costly, long-term.
This does not constitute advice and advice should be sought in all instances before acting on it.
Investment and risk aversion
Even the mention of the work “investment” can get your heart rate on full-speed as you think about the money you could reap as a reward, or lose as a consequence of a bad decision.
The most experienced of investors can still have this sense on anxiety when planning their next financial move, because as humans we are naturally adverse to taking risks.
However, sitting on your cash can also be risky, and costly – so it is about striking a healthy balance.
“What the theory of risk aversion suggests is that we suffer twice as much pain from the losses in investing on an emotional, psychological end than we do enjoy the benefits of making money in the markets.” Tim Maurer, author of Simple Money
When buying a house, or choosing a credit card, the anxiety is less, because you are dealing with material facts and figures. There are usually comparisons that can be drawn and this reassures you that you are making the right choice. With investments the anxiety arises because you are making decisions based on the future, the unknown. Whilst some trends will be helpful, there is no absolute when projecting forward in time.
The best way to combat market stress and investment anxiety is to get educated about investing and the process as well as learn to work within your own boundaries and limitations, at least to start with.
Learn about Investments
When we are not well informed, the anxiety: confidence ratio go up! It is only natural to feel more wary without all the right information to make an educated decision.
Investments are still a mine-field and unless you are trained, or have extensive experience, it usually requires a helping hand from people who are.
However, even if you use an investment manager, the decision is ultimately yours. Asking as many questions as possible, as well as carrying out research will certainly help reassure you when you come to act.
Keep it Simple
Particularly when starting out on your investment journey, keeping it simple is essential to avoid anxiety.
There is little point in making complex investments that cause you to not sleep at night.
Instead work upwards, perhaps moving money from Cash ISA’s to Stocks & Shares ISA’s, carefully selecting your investments along with your attitude to risk.
If you are going alone with investing, rather than using an investment manager, it certainly pays for your stress levels to steer clear of things like complex hedge funds or trusts. For these you should consider getting the help from a specialist who has experience and a track record in this area of investment.
Be Conservative for added Confidence
Understanding your Risk Tolerance is important with investing and choosing a mix of investments that meets this level is perfectly fine.
Particularly when starting to make a stance with investing, a 60/40 portfolio could be a wise route. This means 60 percent of funds invested in things like ISA’s and Pensions.
Choosing investments that you are comfortable to stick with in the long-term is often the key.
Some more aggressive investors choose to allocate 80, 90 or 100 percent into the stock market, which can pay off in the long-term, however this method can be unsustainable due to many variables, including stress.
Looking at a moderate portfolio for the long-term is a better recipe for success than a high-risk portfolio hoping for short-term wins.
Have Cash Reserves for Reassurance
Having cash reserves can certainly help for reassurance in investing.
If on the off-chance everything goes upside down, you still have the “money under the mattress” to fall back on.
Pay off debts and keep adding to your cash emergency fund to make you feel better about long-term investment plans.
Interested in investments? Speak to Darren
If you would like to discuss an investment strategy, Darren can help explain the options available to you, including taking a Risk Tolerance Test. Call to book a meeting.
Tel: 01403 780 770
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