Common Fears of Investing in Stocks

Investing is one of the best ways to build wealth.

But it can also be intimidating, especially when it comes to investing in stocks.

We’ve all seen the horror stories of investors losing their life savings in the stock market.

But should we pay attention to these stories? Is it worth being fearful of investing?

The financial media focuses on fear and uncertainty, while ignoring the more important long-term trends that investors should focus on.

The big picture

Over the long term, the US stock market tends to return around 10% per year, on average. This figure uses data from the last 100 years of stock market returns.

The performance of the stock market in any given year can vary wildly. But if we zoom out and look at the big picture, it’s clear that stocks are an excellent investment for the long-term.

If you’re just getting started with investing in stocks, it’s completely normal to have concerns.

This article will address some of the most common fears of investing in stocks. Then, we’ll dive into how to overcome these concerns and get you started on your investing journey!

Fear #1: Will the stock market crash?

5 Common Fears of Investing in Stocks & How to Overcome Them: will the stock market crash?

The fear of a stock market crash keeps many newcomers from investing.

This fear is somewhat valid: The stock market does tend to crash from time to time.

To illustrate, let’s look at the past crashes of the S&P 500, an index consisting of 500 of the largest publicly traded companies in America.

  • In the 2008-2009 financial crisis, the S&P 500 fell 46.13% over a period of 17 months.
  • This was an extended recession, and the stock market took a full 4 years to recover to its previous all-time high
  • In early 2020, the emerging Covid-19 pandemic caused the S&P 500 to drop over 30% in just over 1 month.
  • This was a “flash crash”, and the stock market took just 6 months to recover to it’s previous all-time high

These drops can be scary while they are happening. But if you don’t sell during a crash, you’ve not sold at a loss. It’s likely that the markets will recover.

This is an important point to understand. Consider this example:

  • You buy 10 shares of Apple stock for $170 each ($1,700 total)
  • You now own 10 shares of Apple stock
  • Apple stock crashes to $120 per share
  • Your investment is now worth $1,200
  • You still own the exact same 10 shares of Apple stock
  • You haven’t lost any money, unless you actually sell
  • If Apple recovers to $170 per share, your investment is back to being worth $1,700

The same is true of index funds (or any other investment). As long as you don’t sell during a crash, you haven’t truly lost any money. But that’s not to say it doesn’t look scary while it’s happening!

If you can hold onto your shares during a downturn (and ideally, buy more shares), then the short-term movements of the stock market aren’t too important.

Key takeaway: Stocks do crash from time to time. But if you’re a long-term investor, these daily, monthly, or even yearly movements don’t matter. Stick to your investment plan, and don’t stress about short-term crashes.

Fear #2: Is investing in stocks too complicated?

5 common fears of investing in stocks & how to overcome them: is investing too complicated

Investing can be as simple or as complicated as you make it.

At the most simple, you can open a brokerage account or investment app, deposit some money, and buy index funds.

You could even just buy a single fund, like an S&P 500 index fund, that invests in hundreds of different companies.

And ideally, you could set up an automatic transfer to continue buying a small amount of index funds each month.

That’s it. That’s all investing requires. You could theoretically complete this entire process in less than an hour — and you’ll be doing your future self a huge favor.

More advanced investors may want to employ different strategies to try to beat the stock market.

This could include investing in individual stocks, actively buying and selling to try to time the market, investing in newer companies via initial public offerings (IPOs), or exploring alternative assets like cryptocurrency and real estate.

None of this is necessary, however. Warren Buffet, perhaps the most famous investor of all time, has an ultra-simple recommendation for new investors:

“Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund”.

There you have it: One of the world’s most successful investors, encouraging you to keep it simple!

Key takeaway: You can get started investing in very simple ways. If you want to use more advanced strategies, that’s up to you — but complexity is not required to be a successful investor.

Fear #3: Are stocks volatile?

5 common fears of investing in stocks & how to overcome them: are stocks volatile

Volatility refers to the range of price change that an asset experiences in a given time frame.

When volatility is low, prices don’t change very frequently. Examples of low-volatility assets include cash (US dollars) and bonds.

When volatility is high, prices change frequently. Examples of high-volatility assets include tech stocks and cryptocurrencies.

The fear that stocks are a volatile asset class is not unfounded: Stocks do tend to be more volatile than many other assets.

But again, it’s helpful to zoom out. While the stock market might bounce up and down week-to-week, the long-term trend is up, up, and up.  

To illustrate, just look at this chart of the S&P 500 index over the last 40 years:

5 common fears of investing in stocks & how to overcome them: are stocks volatile
Source: Google Finance

You can see that there were certainly periods where the stock market was declining. This was most notable during the 2000-2002 tech bubble crash, the 2008-2009 financial crisis, and the (very brief) coronavirus crash in early 2020.

The overall trend, however, is clear: Over time, the stock market tends to go up far more than it declines.

Key takeaway: Stocks can be volatile. But by investing for the long term, investors can ignore the short-term movements of stocks.

Fear #4: Are stocks risky?

5 common fears of investing in stocks & how to overcome them: are stocks risky

If you keep your money in a bank account, your money is safe. Even if the bank is robbed, your funds are insured for up to $250,000 per account.

Investing in stocks does come with risk. You can certainly lose money in the stock market.

But stocks also offer the potential for a great return on your investment. Remember, the broad US stock market has grown 10% per year, on average, over the last 100 years.

Compared to the interest rate on a savings account, which may be just 0.1% or less, it's easy to see that stocks have a higher risk, but a much higher reward.

If you are not comfortable with taking risks financially, sticking to more conservative investments might be wise. Bonds, money market accounts, certificates of deposit (CDs), and savings accounts are all low-risk investments.

You don’t have to invest all your money in stocks, however. Even allocating a small portion of your net worth towards stocks can help you grow your money over time.

Key takeaway: Stocks are riskier than many other assets. If you are risk-averse, it’s helpful to diversify your assets with some stocks, some bonds, some cash, etc.

Fear #5: Is a recession coming?

5 common fears of investing in stocks & how to overcome them: is a recession coming

If you watch the news, it’s easy to get scared about the future.

There are supply chain shortages! A crisis in the labor market! Unrest in Europe!

Whatever the cause might be, it’s easy to think that an economic recession is just around the corner.

And when recessions strike, stocks do tend to lose value. We saw this clearly in the 2008-2009 financial crisis.

But here’s the reality: It’s almost impossible to predict when a recession will happen. Unless you have a crystal ball, it’s better to stick to your investing plan.

If you avoid stocks because you think a recession is coming, you may end up missing out on stock market gains.

For example, many people thought a recession was coming in 2015-2016, and stocks globally crashed briefly.

But the recession didn’t materialize. The stock market went on to rise more than 40% in the following two years.

Key takeaway: Nobody can predict the future. If you avoid investing out of fear of a recession, you could miss out on stock market gains.

How to overcome your fear of investing in stocks

We’ve addressed the most common fears of stock market investing. How can we use this information to overcome our fears?

Start small

You can start investing with a small amount of money, and slowly work your way up.

Even small investments add up, due to the power of compounding interest. Compounding means that you earn returns on your original investment, plus the existing profits of your investment.

Compounding creates a “snowball effect”, where your investments can grow more and more the longer you stay invested.

If a 20 year old started investing just $50 per month, and earned a return of 10% per year, they would have over $450,000 by the time they turned 65. They would only have put in a total of $27,000 of their own money over 45 years, but would end with a balance of over $450,000!

Learn more about investing

Knowledge is power. The more you understand about investing, the more you will feel comfortable with it — and the better investment decisions you can make.

Crux Investor is an excellent place to learn more about investing. Crux members get access to an exclusive library full of educational content, expert commentary, investing ideas, and more. Plus, members get a monthly memo outlining a recommended investment opportunity, based on the research of our industry veterans and analysts.

You can also learn by taking stock market courses, reading investing books, or utilizing a stock market simulator.  

Assess your risk tolerance

All investing involves risk.

Figuring out how much risk you are comfortable with is important. This is referred to as your “risk tolerance”. To find out yours, you can start with a risk tolerance test.

This free test from the University of Missouri will ask you a series of questions about risk and reward. From there, it will assign you a risk tolerance score, as well as an explanation for what that risk score actually means (see table below).

5 common fears of investing in stocks & how to overcome them: assesing your risk tolerance

Knowing your risk tolerance ahead of time is useful, because it tells you how comfortable you might be with risk in your portfolio.

If you have a high risk tolerance, and you’re young, you could potentially invest 100% in stocks.

If you have a moderate risk tolerance and are middle-aged, you may want something closer to a 60% stocks, 40% bonds portfolio.

Understand the risks of not investing

There are many reasons to start investing. And to understand why, it’s helpful to consider the risks of not investing!

To illustrate, let’s consider this example:

Jackson and Raj are both 25 years old. They both work full-time, and are able to save $200 per month towards their long-term financial goals. They both plan to retire at 65 years old.

Jackson is cautious and decides to save his money in a savings account earning 0.5% interest. He continues to save $200 per month. 40 years later, when he retires, he has just $106,000 in his investment account.

Raj is comfortable investing and invests in the stock market, earning an average return of 10% per year. He continues to invest $200 per month. 40 years later, when he retires, he has over $1.1 million in his investment account.

In this case, Jackson’s cautiousness has led him to be under-prepared for retirement. Raj, on the other hand, can enjoy a comfortable retirement — even though both saved the exact same amount of money.

Develop a plan

Like with any other goal, your investment goals deserve a solid plan of action.

Developing an investment plan doesn’t need to be complicated.

It could be as simple as: “I will invest $200 per month in low-cost index funds, and $100 per month in individual stocks of my choosing. I will not sell anything until I need money for a down payment, or I reach retirement age.”

To start, figure out your investment goals. Then, utilize an investment calculator to see how much you need to save each month to reach those goals.

Your plan can always be changed in the future, if needed — the important thing is to have a plan to begin with!

Invest regularly

Within your investment plan (see above) should be a commitment to invest regularly. Ideally, you should invest every month, or even every week!

Investing regularly serves several purposes:

  • It makes it easier to save more
  • It employs “dollar cost averaging” which helps avoid the risk of buying only when the market is high
  • It’s easy to automate and not have to think about it
  • It builds wealth slowly and steadily over time

It’s also less intimidating to invest small amounts of money on a regular basis, compared to investing large lump sums all at once.

Commit for the long-term

Also in your investing plan should be a commitment to stick to your plan for the long term.

Most investors who lose money in the stock market do so because they try to actively trade stocks short-term. It’s exceptionally difficult to predict the day-to-day movements of stocks. Instead, most investors are better off focusing on long-term investments.

Don’t panic sell

Finally, understand that markets crash sometimes — and so far, throughout all of recorded history, they have always gone back up. Sometimes it takes years, sometimes only a few weeks.

The key is to hold on and never panic sell.

If you find yourself selling your assets during a market downturn, that’s a good sign that you may have a lower risk tolerance than you think. If this is the case, you may wish to revise your investment approach.

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