Afraid to Invest? Here's Why It's Normal

Yes, it's normal. Fear of losing money is one of the most common reasons people put off investing for years. You know the money in your account is losing value, but the thought of watching it fall on the stock market stops you.

Fear doesn't go away by reading an article. But it shrinks a lot once you understand why you feel it and what risk really means.

Where the fear comes from

Our brain feels a loss more strongly than a gain of the same size. Behavioural economics research shows that losing €100 hurts us roughly twice as much as gaining €100 pleases us.

Add to that what we see around us: headlines about market crashes, stories of people who lost everything, ads promising quick profits. All of it makes investing look like gambling. No wonder many people prefer to do nothing.

What if I do nothing?

Not investing looks like the safe option. But it has a cost too, just one that's harder to see.

If prices rise by 5% in a year, €10,000 will buy you after a year roughly what €9,500 bought before. The amount in your account is the same, but it's worth less. That's inflation.

A savings account or government bonds can cover part of inflation, sometimes all of it. Over the long term, though, money that just sits in a current account almost certainly loses purchasing power.

A drop is not a loss

This is the most important distinction.

A drop is when the value of your investment goes down. On the stock market this happens often: a few percent in a bad month, sometimes much more in a crisis.

A loss only becomes real when you sell for less than you paid. As long as you don't sell, the drop shows in your broker account, but it isn't a final loss yet.

Broad stock market indices have recovered after past crises, but sometimes it took many years, and the past doesn't guarantee the future. More about indices in What is a stock market index?.

How to reduce the risk (and the fear)

1. Only invest money you won't need soon. Money for next year's holiday or a house deposit in two years doesn't have time to recover from a drop. Your emergency fund stays separate, as explained in How to Start Investing When You Know Nothing.
2. Don't put everything into one company. If the company goes bust, you can lose everything. An ETF spreads your money across many companies, so one company's problems matter much less. See What is an ETF?.
3. Your portfolio doesn't have to be all shares. Bonds and government bonds usually fall less than shares, but also earn less over the long term. Many investors combine them, and the mix depends on how long they have until they need the money and how well they cope with drops.
4. Start with a small amount. The first drop you live through with real money teaches you more than any article. It's easier to get through when the amount is small.
5. You can invest gradually. Some people invest a set amount every month so they don't buy everything at a high price. Others invest all at once. Both have pros and cons, compared in DCA: Dollar-Cost Averaging.

In short

Being afraid to invest is normal and has an explanation. The risk doesn't disappear, but you can understand it and reduce it: invest money you won't need soon, spread the risk across many companies and types of investment, start small, and don't turn a temporary drop into a loss by selling in a panic.

On Lonifi you can understand all of this in short lessons of a few minutes, where Fred explains things to Tom step by step. Listen on your commute, during a break or in the evening, or read them if you prefer. A good place to start is Buy & Hold.

Lonifi content is educational and is not investment advice. The value of investments can go down as well as up.