Monica asks: “I’ve been trying to convince my cousins and other younger family members around me to start a regular investment plan into an index fund but it’s like trying to talk through a black hole. What do you think is the thing that people fear most about investments?”
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Question 21 – What Stops People From Investing? – Shownotes
Today’s question comes from Monica:
I’ve been trying to convince my cousins and other younger family members around me to start a regular investment plan into an index fund but it’s like trying to talk through a black hole. What do you think is the thing that people fear most about investments?
Well, I’ve got a good few ideas:
Lack Of Understanding
Before the past few years, there was never really much genuine and independent education available surrounding personal finance and investing.
There is no part of the education syllabus at schools which covers personal finance and nothing which looks at stock market investing until at least university level, and only then if you take a degree which is hugely aligned with finance.
Instead, all information provided to potential investors was a sales pitch for the mutual funds or brokers who wanted people to invest in a way which maximized their own profits, rather than for the benefits of the investors.
Therefore, I think that there has been a huge education gap which has either led to a lack of understanding, or perhaps worse, a gross misunderstanding of investing principles.
Fear Of Fear Itself
This lack of education breeds fear. People are inherently frightened of the unknown, and this is no different when it comes to investing. The main information provided to people is either from these mutual fund managers (which is hugely over-hyped positivity) or comes from the media and conversations with others when the stock market crashes.
Therefore, the majority of people only think about the latter, when the stock market falls 50% in a year, rather than having a proper grasp of the data and understanding the boring periods when the market increases 5-15% in ordinary years.
The Media
The biggest contributor to the two factors above. The emotive language and reporting on the exceptions is such a sensationalist manner often instills fear into potential investors. It is also a MASSIVE contributor to people investing in inefficient ways (like picking individual stocks). All of these factors are caused by the newspapers’ need to sell newspapers.
Being Overwhelmed
Whereas independent education is getting better, this has come with the increased amount of conflicting information. People often feel overwhelmed when it comes to investing. They see the stocks that are performing well or badly, the media coverage of these stories and all the conflicting information on the new, hottest way to invest.
I’m sure that if more people understood the concept of a low-fee market tracking ETF, they’d be a lot less fear surrounding investing.
The Advice Gap
Then, you have the financial advice gap. Financial advisors are happy to spend time advising their wealthy clients, for which they get appropriately compensated. However, they are generally much less willing to provide education and advice for people who are just starting out, who have less to invest or who live paycheck to paycheck.
This is where sites like Moneystepper come it – both to independently educate, but also to create communities where people can get advice from others in a similar situation. This was one of the key drivers for us creating the Moneystepper Savings Challenge and related community.
Equally, you clearly have to be careful to do your own research and ignore biased and inaccurate advice, but sites like reddit are becoming an increasingly useful resource for people trying to get advice on the “beginner’s issues” concerning finance and investing.
For Good Reasons
This is a lesser considered reason when debating why people aren’t investing. Maybe they shouldn’t be. People who don’t already have an emergency fund together, or they have savings for a house deposit for next year. These people rightly won’t be investing their money in the markets over such a short term.
Better Opportunities
Finally, people may simply have more financially profitable opportunities. For example, better returns may be available for people by paying down high interest debt, by investing in leverages investment property or allocating more of their funds to supporting their small business ventures.
What Stops People From Investing? Conclusion
Finally, people may simply have more financially profitable opportunities. For example, better returns may be available for people by paying down high interest debt, by investing in leverages investment property or allocating more of their funds to supporting their small business ventures.
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Kate @ Money Propeller says
For me, one of the main reasons why people didn’t have an investment because they’re afraid to lose some money. They’re not ready to take a risk.
Jack says
Fear is a big reason.
But I blame ignorance. It’s intimidating to learn enough about money to reach the point where you have enough to feel comfortable investing. If someone isn’t investing money that tells me they haven’t completed their prior steps – following a budget, creating an emergency fund, paying down debt. Once you’ve accomplished those milestones, you understand the power of money and time and are eager for investments.