What Do You Do When You’re Too Scared to Invest?

Check out this question sent to Walter Updegrave over on the CNNMoney website:

QUESTION: Is now the time to invest new money in mutual funds? I’ve been sitting on $100,000 for over a year because the market has been climbing to historic highs. I have always been told to buy low and sell high, so do you think I should wait for the correction before I invest this money. Or should I just invest it now?

– Mike B., Memphis, Tenn.

Poor guy.

The S&P 500 Index was up 15.8% last year, while the Dow Jones Industrial Average was up 19.05%. And that’s not even including this year’s numbers, which are up too. This guy could be sitting on $115,000 or more had he just had the guts to make a move. Of course all this means that the market is a lot higher than it was a year, which probably makes this guy even more leery about getting into the market.

One thing he could consider doing is dollar-cost-averaging into a diversified portfolio of index mutual funds or exchange-traded funds. I know lots of people don’t like dollar-cost-averaging but for people like this guy it makes sense. He could ease into the market over a one or two year period. The risks of this strategy?

1. The market could continue going up, which means he would lose out on the growth of the money that’s not yet invested.

2. The market could go down, reducing the amount that he has invested but would mean each additional purchase would be buying lower-priced shares.

I have to wonder that if the market fell, would this guy have the guts to get in? Or, would he think the market was going to fall further and wait? What happens if the market falls 10% and he waits for it to fall further but the market turns around and moves up 15 – 20% or more? See how this stuff can really start playing with your mind if you let it?

There are no easy answers when it comes to investing. You just have to do it.

16 thoughts on “What Do You Do When You’re Too Scared to Invest?”

  1. I find it baffling that someone would just sit on that kind of money. There is really no excuse not to invest extra money. Investment does not have to be exclusively for risk-tolerant people.

    Risk-adverse people can still participate by way of T-bills, CD (there are some that offer 5.45%APY), or at least a high-yield savings (about 5% APY). Basically, anything higher than the inflation rate (4%) is good.

  2. Assuming the Efficient Market theory is correct, the optimal time to buy in is always “now,” assuming you’re making long-term investments. Ditto even if the market is not efficient, so long as you aren’t *very* sure which fund can exploit the inefficiencies.

  3. The best time to invest is always “When you have the money”.

    Truthfully, nobody knows for certain what the markets will do, but it is always prudent to properly diversify your investments at any time.

    Properly diversifying means investing in assets outside of the stock market as well.

    I agree with Lost Opportunities that an investment in a high interest savings account, at the very least, is necessary.

  4. The fact that this person was explicitly trying to market-time with mutual funds tells me that he probably shouldn’t be investing in the market. Don’t get me wrong – I think that DCA into an index fund is probably the right move for him, but his behavior indicates to me that there’s no way he’s going to be able to do it. He’s much more likely to fixate on short-term fluctuations, and by/sell his way out of his fortune.

    I mentioned in an earlier discussion that I alluded to the idea that not being honest with yourself is the original sin of personal finance; whatever other mistakes you make, it all starts with trying to convince yourself you can do something you can’t. He might have the right reasons for wanting to invest in the market, but his actions indicate to me that, at the moment, he’s a much bigger danger to himself than any short-term market fluctuation. It seems unreasonable to expect him to be able to adhere to the simplest DCA schedule. The right time for him to invest is when he understands that there is no ‘right’ time to invest, and not a moment sooner.

  5. I have to think that this person’s fear comes from not feeling confident in their ability to choose. This person needs education in investing!

    This is exactly the sort of person who would do well to follow the “lazy armchair” style of investing where you put money into a couple of broad-based Vanguard index funds or ETFs and lets the market ride with it. No need to make investing complicated.


  6. Thanks for this website. Lots of good information.

    For many people, simply deciding what to do with 100k would be paralyzing. There are so many places one could invest it that it would be easy to become overwhelmed with fear over making the wrong decision.

  7. Definitely no dollar cost averaging for $100K (unless you’re going dollar-cost average 25K over maybe a month . . . but then that’s not much of an average) You’re better off dumping the lump in and getting the value of time rather than whatever small percentage you’ll gain from buying at a lower price.

    Just buy an index and sit on the money in the index for a few years instead of in the bank.

    How did you get the $100K? If it was a business or investment then just repeat that if you’re not comfortable investing in equities.

  8. I just replied to a similar topic on another blog and thought parts were relevant: In compound interest, like stock returns, the sensitivity is with time and interest rate. The initial investment almost doesn’t matter, just invest something, anything, to get the benefits. If you have 100K the get it in play to expose yourself to time. By sitting on the money in a bank account you lost both interest and time.

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  10. My aunt is 62. She is retired and is living comfortably on her pension and social security. (So comfortably in fact that she tries to give all of her family members money every month)

    She also has about $150K in a 401K. She never plans on using this money for anything, but rather just keeps it to give her some financial security. Over the last 6 years or so, she has ridden the rollercoaster of the market and has actually done fairly well. Now that the market is at it’s peak, she is extremely nervous that it will go down and she will lose some of it. So much so, in fact, that she loses sleep over it. The reality is that only about 35% of the total is actually exposed to stock via a mutual fund. The rest is in bonds (in the same mutual fund) and then a large chunk is in CD’s. She isn’t that exposed and her account doesn’t swing very wildly but she just can’t take the stress of the potential of it going down so she moved it all out to cash. (as of a couple days ago). Now she has it all in CD’s and is sleeping fine. She loses the potential for larger gains, but also feels like she has managed her risk better. I’ve at least got her in 5% CD’s (short term) for now. Her plan is to just take those returns for the next few years.

    We have talked at length about the pros and cons of her portfolio but in the end she just couldn’t take the stress of the market.

  11. The analysis that nobody in the business does revolves around how much money stock markets remove from the economy when they crash… and the sad reality is that because nobody really studies this, nobody knows. Keep in mind that all modern markets use circuit breakers to prevent the kind of crashes (like the kind that happened in the 1930) from ever happening again (or at least offer enough delay that market makers have time to move assets). Free market advocates would argue that this is artificially propping up many markets well beyond sustainable levels. In fact, if markets were held responsible for the the money they subtract from the pockets of finical service consumers during/after crashes, the area under the curve wouldn’t look anything like the 10% to 15% “over the long haul” propaganda offered to the masses by those in the finical services industries.

    The stark, basic reality is that investing is extremely risky business and that there are *NO* givens.

    When the market crashes (and I say “when” because it’s not a matter of “if”), those who’ve sat on their cash will at least have the comfort of knowing that they only lost 5% per year by not investing it. In fact, that’s my bench mark: invest only the amount of money that, if you lost *EVERYTHING* playing the market, would have been equivalent to what you would have lost by sitting on your cash. So, in this case $5k per year would have been about right. Take the the remaining money and do something you enjoy… preferably in some type of money making venture over which you have direct control.

  12. Two years later Mike B. seems to have been absolutely correct to be afraid of a peak. If he followed his instinct and stayed on the side-lines or put his money in CDs he’s feeling pretty good right now. I wasn’t that prescient, but I now find myself in the same situation. I’ve got about $100k sitting in cash, and I’m searching the web to find ideas because I’m too scared to invest. JLP asked “if the market fell, would this guy have the guts to get in?” I’m asking myself that very question. I’m leaning towards “no.” For me, I’m too afraid I’ll get laid-off and have to live on the money until I can find a job, and that may be a long time in this economy. Still, it would be interesting to have this topic revisited with the benefit of hindsight.

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