Seth’s Blog on Finance

Overcoming Aversions to Investing

There’s a group of people who take flight the moment the word “investment” arises. This happens usually because such people have low tolerance for risk or do not understand how to invest properly. These two reasons are also quite correlated – people who are risk averse do not bother to find out how investments work. People who do not understand investing principles end up losing money and then decide to avoid risk altogether.

In the low interest environment and the relentless increase in cost of living, can one truly afford not to seek ways to better grow their wealth? I do hope I am able to help people overcome their fear of investing.

I do not want to lose money

By not investing, the person is in fact readily losing money to inflation. While the absolute amount of cash does not decrease, the purchasing power of it is steadily lost over the years. If inflation was 2.5% p.a. and the bank account offers some 0.5% interest, the value of money would be approximately half of what it is in about 36 years’ time, and only 24 years if inflation was 3.5%.

The consumer price index in Singapore increased to 5.5% last year.

I have a low risk tolerance

Investing needs not be a high risk venture. An investment portfolio can be tailored to one’s personal risk appetite. Someone who is risk averse can thus choose to invest mainly in low risk assets like high quality bonds, for example Singapore government bonds. A properly designed investment plan would have an asset allocation that is suitable for the individual’s risk tolerance.

On the other hand, supposedly low risk savings policies (endowment insurance) expose policyholders to risks in an equity market due to the typical 20-30% allocation in equities of a savings policy. This is usually not explained adequately upfront.

I do not wish to grow my wealth as I have no intentions of retiring

Even if it’s possible for a person to guarantee his willingness to work until he dies, there is no way he can guarantee his ability to work nor his attractiveness to his employer as he ages. Job security has not been a given for some time now and the increasingly competitive job market does not help.

By not preparing for retirement, one runs into the serious and almost inevitable risk of being out of a job without adequate resources to survive.

I have little capital

Instruments such as unit trusts allow one to set aside a small amount to be invested monthly and still enjoy a reasonably well diversified investment. The regular and repetitive nature of a monthly investment plan also compels one to put aside money instead of spending it. Little drops of water make the mighty ocean.

I do not know how to invest

A good financial adviser’s job is to aid you in investing. A professional fund manager’s job is to invest your funds prudently. Of course, nothing beats improving your own knowledge in the matter for your own interests. You don’t need to be a master at it, but at least know enough to keep them in check.

I do not have the time

Most people who hold full-time jobs indeed do not have the time to monitor their investments. Again, there is where I highlight my full-time job tasked to do exactly that. Besides, I believe that a properly designed and well executed investment plan would require minimal micromanaging aside from periodic reviews and re-balancing. In fact, not having the time to obsess over one’s investments can take the emotion out of it, which is a plus point in a world where emotions often work against us.

Can you think of more reasons why people do not invest?