Investing of any kind involves risk. Generally, the more risk you take on, the more potential reward you might earn. Some investments, such as savings accounts and U.S. Treasury Bills, carry exceedingly low levels of risk; but many others, including stocks, have moderate to high levels of risk.
Although every investor wants to earn the highest return possible, many don’t have the risk tolerance to dabble in more volatile investments. But, even if you are risk-averse, you’ll want to invest your money so that at the very least you can keep up with inflation and not lose the purchasing power of your money.
Here are some suggestions for taking your first steps so you can get invested even if you are afraid to lose money.
Use ‘Fake’ Money
One of the best ways to learn about how investments work is to use “fake” money. Many websites, including some offered by brokerages, allow you to open dummy accounts and invest for free using simulated dollars.
The “value” of your account will rise and fall in real time based on the investments you select. By investing this way, you can get the feel for how markets and investments work without risking any of your own hard-earned dollars.
If you’re risk-averse, consider taking baby steps when you make your first investments. For example, if you have $10,000 that you are looking to invest, start with just $1,000, or even $500. This way, you can get the feel for putting your money at risk without worrying about losing your entire bankroll.
As you gain more confidence in your investing, you can start adding more.
Begin With an S&P 500 Index Fund
An S&P 500 index fund tracks the return of its namesake index, which is often used as a proxy for the overall market. With companies like Apple, Microsoft, Amazon, Berkshire Hathaway and Alphabet (formerly Google) dominating the index, you know you’ll be investing in the biggest and most well-known companies in America.
Index funds can generally be bought for zero commission and have low ongoing expenses, making them a great low-cost way to start investing. No less than the billionaire CEO of Berkshire Hathaway, the so-called “Oracle of Omaha” Warren Buffett, has repeatedly said that low-cost index funds are the best option for most investors.
Diversification is one of the best and easiest ways to reduce risk in your portfolio. Diversification refers to owning a variety of investments that don’t necessarily move in tandem.
This not only reduces the risk of owning a single investment; it also reduces the overall volatility of your portfolio as some of your investments will be moving up while others might be going down. Net-net, the volatility of your overall portfolio will be reduced, making for a smoother ride.
While a solid investment strategy for all investors, it’s particularly important for those who are afraid to lose money, as it can reduce the extreme highs and lows of owning a single investment.
Add Money Consistently
Regularly adding money to your account is a great way to smooth out the ups and downs of your portfolio. When the market is down, you’ll be buying more shares at cheap prices. When the market is up, you’ll be buying fewer shares when they are expensive.
This eliminates the risk that you will put all of your money in right at the top of the market, which is one of the biggest fears of most risk-averse investors. It also will ensure that you’ll be buying during times when the market is down, which is a great way to boost returns over the long run.
Consider a Robo-Advisor
Robo-advisors manage your money according to a rules-based algorithm based on your own self-reported investment objectives and risk tolerance. Your money typically will be spread out over a range of exchange-traded funds covering varying sectors of the market, from large and small U.S.-based stocks to international stocks and bonds.
Robo-advisor portfolios are designed to get the maximum return on your money for the lowest possible risk, tailored to your specific investment profile, and they are rebalanced regularly. All of these services typically cost about 0.25% per year, or just $25 for every $10,000 you have invested.
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