Practical thoughts on how to keep calm and not lose the lot.
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So you’ve figured out saving your money is a bad idea because of the Wild West money printing occurring, which is robbing you while you sleep.
You’ve decided to invest your money.
It’s going to be all rainbows, tequila’s in the Las Vegas penthouse, and BMW’s in the driveway, right? Not exactly (and I don’t wish this kind of burden on you anyway).
After studying money for more than ten years and working in financial services in my 9–5 job, the biggest lesson is this: your psychology determines how much the money you invest grows.
When I got into investing myself, the hardest part, once I understood the basics, was dealing with the stress. What nobody tells you in simple terms is that investing your money will be stressful.
The more money you invest the more you will stress.
There is no such thing as stress-free money.
This doesn’t mean investing is a bad idea, or something only people smarter than you or calm like Buddha should think about.
The key here is to prepare for the stress you will feel when you invest your money. Here’s how to keep calm when you invest so you don’t lose the lot (not financial advice).
Invest what you can afford to lose
Let’s cut to the chase. The quickest way to destress the way you invest is to only invest money that you can afford to lose. Most of my portfolio is set up with this mantra in mind. I know that if all stocks go to zero tomorrow, I can still live and buy green smoothies once in a while.
What makes me scared is when the elderly, disabled, vulnerable or people who can never work again come into a small amount of money and want to invest the lot with no backup plan.
Think about it like this: Assume that your investments will fail. Can you still live your life?
Make the dashboard of your investments app your worst enemy
Checking your investments every day will stress you out. Looking at the shiny green and red percentage indicators of how your money is tracking is a very bad idea. The idea is to think about investing for the long term.
The markets are so volatile right now that if you check them daily you will lose your mind. How? You’ll start trying to be a fortune teller and predicting what’s going to happen.
Nobody knows what is going to happen, especially during a global recession caused by a health crisis we’ve never endured before. Anyone that tells you otherwise is probably lying.
Don’t binge on finance news
Looking at the finance news 24/7 is a disguise for short-term thinking.
Sure, stay updated and knows what is happening. But try your best not to news trade. “CNN says stocks to the moon.” One minute later…“Robert Kiyosaki says we’re heading for another Great Depression and to sell everything!”
You will do your head in if you binge-watch the finance news.
Leave yourself an emergency buffer
It’s important to always try and have some cold hard cash at your disposal even though inflation and money printing will kill the value of your savings (the key here is “a small amount”).
The peace of mind you get from having an emergency fund far outweighs what you’ll lose because of inflation. My magic number is $10,000. I always have to have this much money handy in case shit hits the fan and I need to duck for cover.
It’s easier to invest with less stress when you’ve got a small emergency fund.
Talk to a non-commission based financial adviser
What causes further stress when investing is not knowing what you’re doing.
If you have no idea, the markets will ruin you and take your money the same way the casino does. The easy solution, if you don’t have time to learn or don’t work in the industry like me, is to hire an expert.
This part of the process also goes wrong for many people. Most financial experts are nothing more than used car salesmen dressed in a suit and ready to recommend only the products and solutions their firm offers.
The Barefoot investor, here in Australia, got me on to the idea of an Independent Financial Advisor. These advisers are licensed professionals that don’t earn commissions and charge a fixed price for their advice.
By changing the incentives of your financial adviser, you attract a different breed of person. Someone with your best interests at heart and not fuelled by their secret bank account known as “The Lambo Fund” paid for by commissions, is one way to invest with less stress.
Match your risk levels to your psychology
If you’re not a risk-taker then be conservative with your choices.
I, for one, am quite conservative. It takes a lot to convince me when it comes to investing. One of the major areas I invest currently took me years of research before I was comfortable to place my first $100. That’s right, even after all the pain and legwork, I only put in a measly $100.
Knowing your own risk tolerance is key. If your investments are not matched with your psychology, then you are going to be stressing out all the time. Here are what some of the risks look like:
- Derivatives: extreme complexity and a lack of transparency around the risk rating of what you’ve been sold and what has been “packaged up.” (The 2008 financial crisis was caused because of these bad boys.)
- Digital currencies: extreme volatility.
- Stocks: the risk of recession and drops of 30%-40%.
- Bonds: the risk of default on the money you lent a business.
- Treasury Bonds: the risk the government doesn’t pay you back or the bonds have a negative yield or a yield that is less than inflation.
- Gold: little to no growth at times, with no income stream, but often considered a safe-haven.
- Cash in the bank: the reality of inflation and excess money printing.
As you explore the places you can invest your money you begin to uncover the relevant risks. All investing, by the way, carries risk. Even investing time in yourself carries the risk of failure or wasted time that could have been deployed elsewhere.
Taking on too much risk
It’s easy to get ahead of yourself, especially when your investment choices are proving to be temporarily “right” and all you can see is a sea of green up arrows.
When we get cocky with investing, we take on too much risk. We start looking for bigger gains which are normally followed by even bigger losses.
Every time you up your risk tolerance, you up your stress levels.
You can make a lot of money from investing but if you lose your mind in the process, it’s not worth it.
The key is to take it easy and not get ahead of yourself. Starting slow, combined with patience and knowing what you’re doing will help you more than treating the markets like a casino and betting on whatever looks good after a Google Search on investing trends.
Many years ago I invested my money in an asset class that did quite well. To take the stress away, I took the same amount of money I put in at the beginning and cashed it out. That way, all the money that was left invested was upside and if it went to zero, my initial investment was safe.
Taking profit from your investments helps you lock in the gains and it gives you a life hack you can use to manage the inevitable stress of investing.
Recessions are the ultimate stress test
During the good times when everybody is making money it’s easier to manage your stress levels. The part where I’ve seen people collapse is during a recession. People like Tim Ferriss even had their stress levels put to the test.
The point of a recession is to wash out all the bad businesses and the investors that took on too much risk. Think of a recession like an economic detox.
I haven’t managed to avoid the stress caused by recessions either. It definitely takes its toll and it’s easy to think you’ll wake up when your investment portfolio is down 35% and be okay with it. When it happens, it’s never straightforward.
Testing your stress levels during a recession is a good indicator of your risk tolerance and further tweaks to your investment strategy that might benefit your mental health next time around.
How to Keep Calm When Investing
- Focus on a long-term investment strategy.
- Diversify in case one investment type goes bad.
- Get professional, non-biased, commission-free advice from a professional financial adviser who has a few recommendations and passes the bad smell test.
- Don’t think too much about how rich you’re going to become.
- Calm your thoughts by focusing on how you can use the money you earn to help others and provide a meaning for your life beyond digits on a laptop screen.
- Take it slow and steady and don’t get ahead of yourself.
- Avoid the need to brag about how smart you are at investing.
- Prepare your mindset in advance for a recession.
The hardest part about investing is the stress that comes with it. You can’t avoid stress when you invest your money, but you can manage it and plan in advance for what might happen.
Your stress levels are far more important than your investment returns.
As we learned from John D Rockefeller, there is no point having a tonne of money if all you do is stress about it all the time and don’t have time for you, and hopefully, others, to enjoy it.
Keep calm when investing by learning to deal with the inevitable stress in advance and matching your investment choices to your psychology.
Your psychology determines whether the money you invest will go up or down, not the markets.