We all deserve leading happy lives. Adequate financial security is an important requirement for this. We make investments to secure our futures. But investing often causes stress. Therefore learning stress-free investing is all the more imperative. In this article, I will explore what causes investing stress and how to avoid it.
What Causes Investing Stress?
Fear of risk and fear of loss are the two predominant reasons for investing stress. Let us examine them in a little more detail.
Fear of Risk
We are all afraid of taking risks. It is quite natural. But not taking risks is the biggest risk I could take.
Further, as Warren Buffett says risk comes from not knowing what we are doing. The risk is not attached to any particular investment or instrument like stock or bond.
Fear of Loss
Fear of incurring a financial loss is the other major contributor to stress in investing. In my opinion, fear of loss is the root cause of the fear of taking a risk, which we discussed earlier.
Fear of loss is a legitimate fear. In fact, every investor should be afraid of suffering an investment loss. Warren Buffett prescribes only two rules of investing, “Rule No.1: Never Lose Money. Rule No.2: Never Forget Rule No.1”. Therefore avoiding loss is right but fear of loss is not.
We have so far understood the key reasons behind investing stress now let us examine how to make stress-free investing.
Ingredients of Stress-free Investing
Following are the vital ingredients of stress-free investing:
Investing is an easy to learn and interesting subject. So learn it. Then you don’t have to depend on an advisor or a mutual fund. You will save on the high fees they charge.
What is the first step in beginning to learn to invest?
Order your copy of “The Intelligent Investor” by Benjamin Graham on Amazon immediately. It a classic. Warren Buffett swears by it. It changed my life. It will mould yours too.
Never Buy Shares at High Prices
The easiest solution to stress-free investing is buying shares at or below their fair price. Never buy stocks at high valuations however popular or successful the company may be. This what Warren Buffett meant when he said, “Don’t Lose Money”. When you buy stocks by paying unjustified prices, you have a greater chance of losing money.
In order to pay the fair price for a stock, you should in the first place know it’s intrinsic value.
Never Trade in Stocks
I say this out of my personal experience. In the beginning of my investing journey, I was a day-trader. The anxiety and stress of day-trading caused my hypertension which I suffer to date.
Never Invest for Short-Term
Stock markets are not only dynamic they are also cyclical in nature. What I mean by cyclical is that if the stock market is enthusiastic it will last for a long time. Even for a few years. Similarly when the stock markets are pessimistic the depression could last for several years.
Please note that the stock market swings from extreme optimism to severe pessimism like a pendulum.
When you invest for a short-term, say three to five years, even excellent stocks and mutual funds could be trading at prices far below their intrinsic value. Many innocent and unaware investor get scared and sell their holdings.This results in a financial loss.
On the contrary when you invest with a long-term timeframe, say 30 to 40 years, these stock market ruffles even out.
Investing in good stocks after a thorough research and then leaving them undisturbed for a very, very long time, not minding the stock market gyrations, is stress-free investing.
Never Measure Investment Returns From Short-Term Price Movements
Investment returns primarily accrue through regular income like dividends and interest. The capital appreciation is only a complementary part. While the long-term capital appreciation on the back of the growth in revenues and profits of the company is the prominent contributor to wealth creation, short-term movements certainly are not.
Unfortunately, even mutual funds and the so-called experts casually measure investment performance only through short-term price fluctuation. By this, they are doing a great disservice by misleading the innocent investors. Luckily regulators globally are waking up to this grave mistake. They are forcing mutual funds to disclose comprehensive returns including regular income like interest and dividends.
In summary fear of financial loss and fear of investment risk cause anxiety and stress. Value investing is a sure, safe and stress-free investing method taught by Benjamin Graham. By becoming a value investor and following the above suggestions you can be a stress-free investor.
I wish you happy investing and stress-free wealth creation!