4 Limiting Beliefs About Investing [And How To Address Them]
Investing for Yourself
Whether due to complicated financial jargon, indecision about specific investments, distrust in the stock market, or skepticism about the ethics of investing in global corporations, just thinking about investing in the stock market can stir up feelings of confusion, self-doubt, worry, and anger (to name a few). All too often, these feelings deter people from investing in their future and growing their wealth.
Investing in the stock market is important, in large part, due to inflation. Throughout history, the purchasing power of a single dollar has dramatically declined. In 1924, a movie ticket cost $.25. Today, the average movie ticket costs $10.78. You could see 43 movies in 1924 for the price of 1 movie ticket today! If you put $220 (or 10% of the average annual income in 1924) into a savings account in 1924, it would be worth $222.21 today. However, if you instead invested $220 in the stock market in 1924, it would be worth over $3,000,000 today! By investing in the stock market instead of simply putting money into a savings account, you can far surpass inflation - and see a lot of movies one day.
Combating Limiting Beliefs
Limiting beliefs are judgments about yourself that you believe to be truths. Everyone has limiting beliefs (financial or otherwise), which prevent us from achieving our full potential. Addressing your limiting beliefs about investing will open the door for you to achieve your goals - you deserve to achieve your goals - and to feel increased financial safety and security.
4 Limiting Beliefs About Investing [And How To Address Them]
1. “It’s too complicated.
I will never understand.”
Financial jargon can feel confusing, overwhelming, and intimating. Financial jargon also makes investing in the stock market inaccessible to the masses. If you feel confident in your understanding of investing and the stock market and choose not to invest, that is your prerogative. However, if your limiting beliefs and all-consuming feelings about investing simply result in you not investing, it is worth learning more about investing, so you can be in the driver’s seat, taking control of your financial future.
Fortunately, you do not need to know as much financial jargon as you might think in order to feel confident and empowered to invest. I am a Certified Financial Therapist, Certified Financial Social Worker, and, more importantly, a personal finance nerd (I suppose this goes unsaid), and I cannot tell you what the Diluted WASO or EBITDA Margin is. To be honest, I cannot even tell you what those acronyms stand for, and that is more than okay. I know enough, and you can know enough too!
From Compound Knowledge to Compound Interest
Think of a hobby you enjoy. Let’s say cross-stitching. Now, think of a list of words and concepts related to that hobby. For example, DMC stranded cotton, French knots, and skein. To most people, those words mean nothing, but to you, they make complete sense. When you first started cross-stitching, you probably had no idea what those words meant. Now, you use them fluidly and fluently, without hesitating to think about their meaning. Instead, you are only increasing your cross-stitching terminology as you learn new stitches and patterns.
Investing is the same as cross-stitching. As you learn more about investing and begin investing money yourself, your knowledge will start to compound. You will feel increasingly confident and empowered to ask questions, learn more, and make decisions that help you to achieve your long term goals. Investing is not beyond your comprehension; you are just starting to learn a new hobby!
Complex Investing
→ Empowered Investing
Remember…
When learning a new hobby, you will almost certainly make mistakes along the way.
Dedication and commitment to learning and practicing a new hobby always yields results.
Create your own Duolingo for investing, and learn one new word each day.
Today’s word: Stock
Tomorrow’s word: Ticker Symbol (there’s no shame in watching kids videos to learn!)
Do not ask your friend who ‘day trades’ and always talks about the ‘block chain’ for help. While it may seem that they are knowledgeable, more often than not, they will contribute to your feelings of inadequacy or incompetency.
Work with a Certified Financial Therapist or an Accredited Financial Counselor to learn more about investing and to address your feelings about investing.
2. “I cannot invest in companies that do harm to the environment or mankind.”
Great! You don’t have to!
How you spend, save, and invest your money speaks volumes about your values and priorities. Not wanting to invest in companies that do harm to the environment or mankind makes complete and total sense (do not worry - you do not have to invest in Amazon if you do not want to).
Fortunately, there are many companies that you can invest in that are doing good for the world! By assuming that all companies are doing harm, you are actually missing opportunities to help companies that are doing good to grow. Sustainable (ESG) Investing and Socially Responsible Investing (SRI) are becoming increasingly common because of people like you.
Sustainable (ESG) Investing
Companies are now given an Environmental, Social, and Governance (ESG) rating, which takes into consideration greenhouse gas emissions, toxic waste management, safe and healthy workplace conditions, access to healthcare, diversity among board members and senior executives, and so much more! ESG ratings give investors deeper insight into a company’s commitment to doing good. ESG ratings are relatively new (created in 2004); therefore, ESG ratings are not yet perfect. However, they are a great start to an ever evolving shift to more sustainable investing.
Socially Responsible Investing
Socially Responsible Investing is investing in companies that directly have positive social impacts, such as investing in a solar energy company. SRI also allows you to evaluate companies based on your beliefs, values, and morals. You can invest based on your religion, political beliefs, etc. SRI requires a little more legwork than ESG investing, as ESG ratings are universal whereas your beliefs, values, and morals are unique to you.
ESG and SRI Investing Performance Advantages
According to Morgan Stanley, a global investment banking company, sustainable investments outperformed traditional investments 12.6% to 8.6%. Some even argue that sustainable investments have more potential upside as an increasing number of companies are trying to be more diverse and environmentally-friendly. However, this is not a guarantee.
Anti-Investing →
Ethical Investing
Learn more about the differences between Socially Responsible Investing (SRI) and ESG Investing.
If you still do not want to invest in the stock market, consider investing in small businesses or real estate.
Read…
The Millennial Money Woman Fiona Smith’s step-by-step guide to investing in small businesses.
Read How To Invest In Real Estate: The Ultimate Beginner’s Guide To Getting Started by Joshua Dorkin and Brandon Turner.
Explore Wefunder, which has made investing in small businesses more accessible. With Wefunder, you can invest in a variety of businesses from Dope Coffee (a black, woman, and veteran owned hip-hop coffee brand) to Seedsheet (which strives to reduce food waste and plastic consumption) to Cadence OTC (which is trying to make birth control accessible over the counter).
3. “I’m going to lose all my money in the stock market.”
Throughout history, the United States economy has continued to grow despite many economic setbacks. It is inevitable that future setbacks will occur, which can feel very scary. It is true that many people have made a lot of money in the stock market. It is also true that many people have lost a lot of money in the stock market.
Generational Financial Differences
When you were born can greatly impact your feelings about investing in the stock market, as your life experiences shape your financial beliefs and feelings.
Many Boomers were born to parents who lived through the Great Depression. They grew up witnessing their parents’ financial anxiety, scarcity mindset, and distrust in the stock market, which certainly impacted their own beliefs and behaviors.
Late Gen-Xers and elder Millennials experienced the Great Recession during a pivotal time in their lives - young adulthood. Due to this experience, many of them are hesitant to invest in the stock market to this day.
Gen-Z have spent most of their lives in a strong, growing economy. While they are still young and therefore not investing as much in the stock market, they are projected to be optimistic about investing.
Awareness about your generation’s specific financial experiences can shed light on the formation of your limiting beliefs about investing.
Stock Market History
While your feelings and experiences are real so are facts. Let’s take a look at some facts about the stock market. Pay attention to how reading these facts makes you feel.
Stock Market Downfalls
Since World War II, recessions have lasted 11 months on average.
The longest recession in US history was the Great Depression which lasted 3.5 years.
The shortest recession in US history was the Covid Recession which lasted 2 months.
The Great Recession of 2007 to 2009 lasted 18 months.
Since World War II, the United States has experienced a recession every 6.5 years on average.
Historically, the average annual stock market return is 10% (a lot more than a .01% checking account!).
Since 1926, only 8 years have performed between 8% and 12% annually; the other 90 years, the stock market performed lower than 10% or much higher than 10%.
Over a 1 year period, investors are 77% likely to have positive returns.
Over a 3 year period, investors are 87% likely to have positive returns.
Over a 10 year period, investors are 97% likely to have positive returns!
Fearful Investing →
Factful Investing
Learn about diversification.
Diversification means investing in a variety of assets (perhaps real estate, index funds, bonds, and \ or gold) in order to mitigate risk.
Diversification helps to reduce feelings of fear about losing all of your money in the market and keeps your portfolio balanced.
Increase your savings.
People with fear and anxiety about losing money in the stock market may prefer to keep more money in their savings account.
Remember that you have not actually lost money in the stock market until you sell your shares.
In the event that the stock market crashes, you will be able to utilize your savings and avoid selling any shares until the stock market recovers.
4. “I don’t want to make the wrong choice, so I’ll make no choice instead.”
Overthinking to the point of inaction, also known as analysis paralysis, is very common in people investing for the first time. You may not know where to invest (a Roth IRA, an HSA, a 401k, etc.) or what to invest in (stocks, mutual funds, index funds, ETFs, etc.). Instead of making the wrong decision, you make no decision. Unfortunately, if you do not invest in the stock market or housing market, growing your wealth will be very challenging. Therefore, avoiding investing altogether may not be the answer.
The Paradox of Choice
We think that we want more options. More is better right? Wrong.
Barry Schwartz’s book The Paradox of Choice (and excellent TedTalk) explores how increased options brings consumers greater stress than fewer options. For example, imagine you have three ice cream options: vanilla, chocolate, strawberry. You can probably make a pretty quick decision about which flavor you would like right now. You would order your ice cream with little to no regret and feel content with your decision.
Now, imagine instead you have one hundred ice cream options! Pistachio, mint chocolate chip, mango, coffee - you name it! You feel overwhelmed and stressed about making the wrong decision. You are torn between ten different flavors and need to sample all of them. Should you order a new flavor or go with your usual (cookie dough for me)? You wait until the absolute last moment, when everyone else has ordered and the cashier is looking at you, to make your final decision. You may enjoy your ice cream. You also may be filled with doubt or regret about your decision.
Simply Not Investing →
Investing Simply
Remember that, worst case scenario, you can always change course and make changes.
Do not strive for perfection. No investment is perfect. Strive for good enough. Plenty of investments are good enough.
Once you have made a decision, you can automate your investments, so you do not have to continue ruminating and evaluating future investments.
Set a deadline for yourself. Without a deadline, you may put off the decision forever and miss out on growing your wealth.
Read The Simple Path To Wealth by JL Collins to learn more about the pros and cons of index funds. Collins simplifies index fund investing to help make your decision making process easier.
