How Fear of Losing Money Keeps You from Getting Rich
The path to building a portfolio of savings and investments that can help you achieve your long-term goals such as retirement requires taking some risk. The stock market has many red days, and not every investment pans out.
But risk is a normal part of investing, and people who fear losing money may hold them back from reaching their financial goals.
What you need to know about opportunity cost
If you’re tempted to keep your money in cash on the side, consider the impact of opportunity costs, or the potential benefits you’ve missed out on when choosing one investment over another. In other words, how much money do you lose by playing it safe? For example, if someone invests $10,000 in an S&P 500 index fund that maintains an annual growth rate of 8% over 20 years, that $10,000 will turn into close to $47,000.
Meanwhile, $10,000 in a checking account — which typically doesn’t earn interest — won’t grow at all (and inflation will eat away at your purchasing power). High-yield savings accounts have the highest annual percentage rates (APYs), but those yields are still much lower than what you’d find in the stock market.
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Using the bucket strategy
Many investors are afraid of losing money in market risk, and investors who have seen 2008, 2020 and 2022 have reasons to worry. However, declines are a natural part of investing in the stock market, and those same declines can present compelling buying opportunities.
While young investors tend to buy dips, older investors nearing retirement may choose to take a more direct approach. That’s why a bucket strategy — which involves allocating money to short-, medium- and long-term assets based on your time horizons — can help. The strategy involves having some cash on hand for emergencies and short-term goals. Retirees may want to withhold enough to cover one to two years of their living expenses. That way, you don’t need to sell stocks to cover basic living expenses and you can offset market volatility.
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Review your risk tolerance and financial goals
Everyone should know their risk tolerance and financial goals before deciding how much to invest. Your risk tolerance indicates how much money you are comfortable putting in line for long-term growth.
Your financial goals may include buying a home or retirement, or short-term goals like going on vacation or getting married.
It’s important to align your financial goals with your risk tolerance – but it’s also important to be realistic. You can’t turn a $1,000 portfolio into a $1 million portfolio in three years without making some very risky speculative investments, a risk most investors don’t want to (and shouldn’t) take.
Choose investments that best match your risk tolerance, but also don’t choose fear over future growth. Finding the right balance makes it easier to build sustainable wealth and insulates your portfolio from dramatic price swings.
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