Following up on my last post, I would like to write today about fear.
Just as a reminder, in my last post I introduced 3 important topics, that are necessary to understand and successfully turn towards an investor mindset. These 3 points are the following:
- Understanding and accepting the principles of the so-called “financial triangle” (part 1)
- Overcoming the emotion of fear when it comes to investments (part 2 – this one!)
- Investing time to make informed decisions on investments (part 3 – next week)
The fear of investment
This topic came up partially a few times in some of my previous posts in the past. However, I would like to dedicate one article specifically to this topic with a few more details. The reason is, that once you understand the principle of the financial triangle, which I introduced just last week, you will realise that taking risks is an unavoidable part of any type of investments.
This is a serious and very important realisation, because it makes it crystal clear: If you can’t accept taking risks, you can’t invest successfully. And this happens to be not only true for many people, it is also one of the main issues that is holding people back from starting to invest in the first place.
The idea of the potential for losing even a tiny fraction of ones savings, frightens so many people in such a strong way, that instead of evaluating their options, potential risks and corresponding opportunities, they immediately dismiss the entire idea and stick to keep doing what they were doing so far: Nothing.
Now let me tell you something about doing nothing. There is a great quote that fits very well on several topics, including this one:
“Standing still is the fastest way of moving backwards in a rapidly changing world.”
– Lauren Bacall
The same goes for your hard earned money. Doing nothing is not a safe thing to do. Just the opposite. Doing nothing is a guarantee for losing money.
The no.1 reason for this phenomena is called inflation. You surely heard this word very often before, but truly understanding it, should make you worried. Because if you truly understand it, you will know that the value of this 500 USD under your pillow will have a much lower value next year. And the year after. And the next year also. It doesn’t end.
This may be not a perfect example because there are obviously more things connected to it, but take a look at prices for mobile phones. Let’s take specifically the iPhone. On June 29, in the year 2007, the iPhone was released with an introductory price of 499 USD. It was a top product with the latest and most modern technology on the market (if not compared to SoftBank phones in Japan, those were lightyears ahead).
10 years later, the iPhone X came with the lowest price-tag at 999 USD.
So while your 500 USD would have been enough in 2007, to buy the newest iPhone, in 2017 those 500 USD would be only sufficient for a 50% down-payment, again for the newest available model in that year.
The macro-economics behind that are of course highly complicated, but at the end of the day, Apple is not just raising prices to make even higher profits, but to ensure stable and increasing profit margins and to pass on their own costs for research, development, suppliers, etc. back to their customers.
So good or bad example, you get the point. Prices go up and the value that this 500 USD offered to you in 2007, came down by half in only 10 years. And you can see similar examples in many other areas. Whether it’s diary products, vegetables, fruits, gasoline and whatever else comes to your mind. Prices go up, thus the value of those saved USDs is constantly going down.
Saving accounts & Government Bonds
Inflation is covered pretty well in the press, thus most people are aware of it and understand, that putting money under a pillow (or certainly better: in a safe) is not a smart long-term solution. Therefore, those who seek security, tend to put their money into saving accounts. With the current interest rate it’s not a money maker either, but the argument is, that saving accounts are offering at least a little protection from inflation. Same is being said about government bonds.
But let me ask you a thing: Are you sure, your money is safe there?
First, let’s talk about saving accounts. The financial crisis of 2007 and 2008 is dating not that long back. But its effects did last far longer, and, according to Wikipedia, between 2008 to 2012, the amount of banks which failed and had to either declare bankruptcy or a restructuring, mounted up to 465 bank in the US alone. Now what happened with all those savings accounts in these banks?
When you check the details of your savings account with your bank about the protective systems that are in place to ensure that you get your money back, even if a bank fails, you might discover a surprise. Some banks cover as little as 20.000 EUR and most banks in Europe have changed their policies and regulations to a point that they now protect not more than 200.000 EUR. This goes for your savings accounts, but not necessarily for your current account.
How things can turn out with your current account can be even more dramatic. Just ask the people in Italy, Greece or Cyprus about their experience with banks in the last 10 years. When your country gets in financial distress, which can very well be caused by a financial crisis, you may experience going to an ATM to withdraw some cash only to find, that it’s not working. You go to the next bank and the next ATM, and you find that they all are not working. You turn on the news and suddenly you see, that all banks in the country have shut or limited operations – and you have no more access to your account.
What you’re gonna do?
I got no answer to this question, but my point is that, if there will be another financial crisis, its effects can have a profound impact on investments that most people consider to be safe. They are not, at least not to that degree as one would love to believe.
So, if you have no way to fully protect your assets from a financial crisis, you might, rightfully, be scared about savings and investments in general.
What is the right strategy in this kind of a situation? Well, it’s not an easy one. We have to face our fears. We have to understand, that risk is just part of how our world works and we have to learn to manage it.
There are a few easy, understandable strategies and techniques, that can help anyone who puts a little time and effort to understand them, to minimise risks and to increase the potential for higher returns on your assets.