When asked why they’re not interested in investing, most Australians cite lack of knowledge, disinterest and fear.
Many people still have memories of the global financial crisis and the effect that had on their own investments or those of family and friends.
These are all natural responses. Loss aversion, or fear of the unknown, is an evolutionary response. However, that same fear holds us back when it comes to investing. We refuse to take a well calculated risk that could immensely benefit and enrich our lives because we’re fearful of losing money.
If this sounds familiar you are potentially missing the most effective way to grow your wealth.
Many Australians aren’t investing
A huge percentage of Australians have their personal savings sitting in cash and term deposits. You might expect that cash in the bank would be most popular with older generations, but under 35s actually have the highest percentage of their money in the bank. It’s ironic that those with the longest time to benefit from compounding returns are avoiding them because of fear.
Interest rates have fallen dramatically over the past 10 years, and, according to Canstar, $10,000 in a bonus savings account earned $505.98 a year in 2011, compared to just $114.72 in 2020. That’s a difference of nearly $400.
Compare that to the returns made investing in other types of assets over the past 10 years.
Yep – Even factoring market falls – like the fall during the first stages of COVID – those who stayed the course earned a much better rate than those with their money in cash.
Granted, this is much easier said than done when the world is in financial meltdown but it shows that even over through rough patches, those who embraced fear did best.
Shares have always recovered from short term falls
Over the long run, shares have always recovered any short term falls and continued higher. If you look at the graph of the Australian shares over the long run, the falls are blips in an otherwise upward trajectory.
Money in the bank will keep your money safe, but the graph above shows you’re missing out on potential wealth creation that simply isn’t possible in a savings account.
Reduce investment risk with diversification
It’s your approach to investing that will make it less scary. The idea that you need to research stocks, understand how to calculate PE ratios, and magically know when to buy or sell are some of the main culprits that lead people to think investing is daunting.
Investing like that isn’t necessary or smart these days when you can piggyback off everyone else’s research by buying ETFs.
You can also reduce your fear by having the right mix of defensive investments like bonds. Defensive assets cushion your portfolio when markets fall, and can take a lot of fear out of investing.
Technology can manage your fear
The rise of financial technology (fintech) has fundamentally changed how people invest. It’s made investing more accessible, transparent and personalised. Technology lets you invest your savings with a professional without having to pay high fees to a financial adviser.
An online investment adviser, or robo-adviser, like Stockspot uses technology to manage the entire investment process for you online. This includes providing investment advice and asset allocation (what you invest in and the percentage of your money in each asset) and personal guidance to keep on track. This means investing doesn’t have to be daunting or difficult because the investments and ongoing strategy are all automated.
Taking the leap
Taking a cautious step into investing might be daunting, but anything worth doing in life involves some risk. Investing helps you keep up with inflation and puts you on a path towards financial security. All you need to do is focus on the long-term, avoid stock-picking, and minimise risk by diversifying your investments.
Stick to these key principles and take the first step.