Cannot get myself to invest money for "fear" of mistakes

[SilverElephant]

I'm having real trouble getting myself to actually invest my money, i.e. getting past some psychological barriers. This bothers me because it's the next step required to generate cash flow and I currently obviously suck at it.

My current savings rate is just shy of 70% and is mostly held back by the fact that rents in Munich are comparatively expensive. I'm due for a raise in my main job/source of income, but part (30%) of my income is freelance work and unpredictable, so I'm expecting this SR to remain between 60% and 70%. So this is not the issue, currently.

The real issue is the cash buildup, currently at above 100k. My income-related activities currently leave me little time to read, so I haven't been able to get enough of an understanding of investing and investments to feel comfortable picking stocks or even sectors. I expect my accumulation phase to last a few more years in which this constraint on my time will remain the same, though I'm already thinking about how to phase into part-time work (although I genuinely enjoy my job).

The bottom line is I've read just enough on investment in books and this forum to know I don't know anything and how to avoid the obvious mistakes, but not enough (I feel) to make wise choices, e.g. I consider myself just beyond mount stupid (known unknowns). Everything I read points to the market as a whole being overvalued, but I don't know how to pick out undervalued or fair-valued sectors. I'm not particularly risk-averse, what bothers me is that currently I can't even begin to assess the risk. It's also clear to me that there will be some "price of experience" to pay, but obviously I'd like to keep this down as far as possible.

Maybe someone here has had this same issue? How did you "push past" or did you end up waiting for lower asset prices? Maybe a comparatively large cash position is not too bad, currently, after all? But then I should have taken advantage of things like low oil/gas prices and bought a few Total stocks or something, which I did not do "because they might drop further and I might get them cheaper/lose my money"? Should I read more to further my understanding and if so, what to read? Wind down my income-producing activities (prolong the accumulation phase) to make room for more reading?

Further note: I do have investments that my mother left me when she died. These amount to roughly the same as the cash position, but consist of equal parts of actively managed funds (average TER 2%) and synthetic broad-spectrum ETFs from Deutsche Bank (which makes me nervous considering their position). None of these are distributing investments, meaning they currently offer no cash flow.

[cmonkey]

It's pretty easy to get caught up in 'analysis paralysis' when trying to invest. When I first started out I put my money into well known names/brands that I knew wouldn't completely tank. I also started off investing small amounts of money (between 1-2K).

I've been doing/watching/learning for over a year now and I feel more comfortable putting my money into other "less known" investments (things an average joe has never heard of). I also am investing more at a time (3-5K) because I'm a bit more confident and I want to reduce commissions.

I have started dividing my decision making into two forks - number/fact analysis and sentiment analysis, this being a bit more important for me. The numbers might look good (P/E, PEG, etc...) but if general sentiments aren't good, the investment isn't going anywhere. Pay attention to the analysis/news pieces for your investment. How do people feel about it? If you catch something that has good numbers, and the sentiment is turning from negative to positive it's probably a good bet.


Start with baby steps and see how they go. This is the kind of thing where experience is your friend.

[Chad]

I would think most of us were fearful at the beginning, so don't assume that indicates you are a bad investor. It may demonstrate you aren't comfortable with it because you don't have the knowledge. No time to read. Ideally, you would want to do some decent reading if you are planning on picking individual stocks, very specific specialized funds/ETFs, or market timing. However, it appears you do not have time to read and research much, so this might not be an option.

Other options for you would be to select a very easy well proven style and stick with that style. For instance, the typical 60/40 index fund or the Perfect Portfolio strategy. For the 60/40 strategy you could probably get by with just reading a few well written articles, while the Perfect Portfolio would probably require reading one book.

Another easy way for a 60/40 type strategy is to use a robo adviser, as each kind of uses some version of this strategy. The robo advisor asks you a few questions and then builds you a low cost portfolio. You can then average into it over a few years if you don't want to chance a big drop after putting it all in at one time.

I did a very very brief search for European robo advisers and came up with this list:
http://www.investopedia.com/articles/fi ... visors.asp

[Spartan_Warrior]

Back when I was first starting my career (and saving money to exit it), there was a website called WeSeed that allowed you to "virtually" (i.e. pretend, no money exchanged) invest in real stocks and track how your investments would have performed. I now see that this particular site has been out of commission for three years (how time flies), but I'm sure there are similar websites or apps. If worse comes to worst, you could set up similar "virtual" investments by tracking individual stock prices in Excel.

Beyond that, I've learned over the years that I'm going to make mistakes--a lot of them, in fact. My solution has been setting up my portfolio and asset allocations to minimize how badly those mistakes can harm me. I simply employ a conservative investment strategy and stick to pre-determined asset allocations. I follow the Permanent Portfolio for the bulk of my investments, with about 20% for my more speculative investing, which at the moment is dividend stocks. All strategies have risks, of course; the risk with a conservative strategy is missing out on big gains. But I think missing out on the big losses is a fair trade-off, especially if you are hoping for the shortest accumulation phase. YMMV.

[SilverElephant]

Thanks for the quick replies everyone!

@cmonkey: Good tip about the baby steps. The thought of investing tens of Ks at a time can be a bit disconcerting. By well-known brands do you mean blue chips and the likes?

One more aspect about "analysis paralysis": jacob has, on a few occasions, hinted at the whole of "paper money" possibly becoming worthless in "short" order (very few decades). Of course this has me wondering if ditching stocks and buying into REITs or actual rental units nearby isn't the better alternative. Then again, how will this place look if stocks go to zero? Social capital and easily marketable abilities will probably be worth a lot more.

@ Chad: Thanks for the link. I had a look at the two German companies listed there. I'll take an in-depth look later today, but the first thing I noticed is that all of them ask about the time frame - that is, "how long do you plan on investing this money?". Apparently "indefinitely and I'm looking for cashflow" isn't on the menu. Reminds me of the blank look I got from one investment counselor I met in a bar once when I suggested tuning the savings rate to get a lower retirement age. It' just not a mental option.

@Spartan_Warrior: Thanks for the tip. I started setting up a Google Sheet some time ago but found it very cumbersome and error-prone to get automatic historical quotes. Guess I'll have to track the numbers by hand. Also, which variant of the PP did you use?

[cmonkey]

The thought of investing tens of Ks at a time can be a bit disconcerting. By well-known brands do you mean blue chips and the likes?

I am not at the point where I will invest ten's of K's either (also don't have the funds yet). It takes a lot of time and experience to be able to do so. I think ideally, one would grow in experience/confidence as one's portfolio amount grows, but one can certain start with as much cash as you do as well. If I suddenly came into a wind fall of 6+ figures, I would still only invest a few thousand at a time. My experience isn't there yet.

Blue chips, yes, the more well known ones. IBM, CAT, and the like. I think I got a little lucky on those two, sentiment wasn't quite there until lately.

[slowtraveler]

I think what you're feeling is completely normal. Though the value of all stocks won't go to 0 as long as the goods businesses produce have value. I believe he referred to fiat currency, it's value is almost guaranteed to decrease over decades.

I began with individual stocks and moved towards indexing. To research stocks properly takes a lot of time and there are other ways to enjoy modest growth without the research. I've chosen a portfolio with a strong chance of good growth and less draw downs than all stocks. Granted, I'm still averaging into it but I'm over 90% invested now and keep plenty of cash on hand.

The Permanent Portfolio is focused on minimizing draw downs. A little complex at first but great for safety. Check out portfolio charts for more on this.

All world index would capture the growth of world markets. But I wouldn't recommend this to you if fear is big, as there will be dramatic drops.

I'm investing in Wellesley for my parents as it's conservative but still enjoys solid growth over time and has a decent cash flow. Check out my thread on "Investing for Parents", it's what Jacob (and others) said would likely work.

These strategies are all better than holding cash for 10 years because of fear. If you want something simple and likely to work while you learn more, try Wellesley fund and invest a couple thousand every month. Your fears will melt away over time but only if you get started.

[George the original one]

Since you're in Germany and don't have much experience/desire for stocks, indexing and bond funds are probably the right way to go. The fear component should go away since you'll be guaranteed "average" performance. If your stash is large enough, you should also consider rental property.

[Spartan_Warrior]

@SilverElephant: I use the regular 4-part Permanent Portfolio. One part cash/short-term treasuries, one part long-term treasuries, one part S&P index funds, one part gold. The only difference is I have the asset allocations at 20% for each rather than 25% so the remaining 20% is allowed for my own speculative purchases of individual dividend stocks.

[Chris]

Focus on cash flow. That's the true purpose of your investing, right? So the only rational fear you can have is your investments not producing the cash you need to survive. This concern is much easier to mitigate than eliminating a fear of price volatility. Price volatility is guaranteed, but the chance that a diversified portfolio stops producing cash is not.

As far as waiting for lower asset prices, you can wait.... and maybe prices will come down. But wait for how long? Are you willing to delay FI while you're waiting?

To find out, I would create a spreadsheet to forecast the future, using years and various yields. Use your expected income (plus your existing 100k) and forecast out 10+ years. Then in the other columns, multiply by the yields. You should end up with a bunch of cells that meet or exceed your expenses. Those are your candidates.

With that spreadsheet, you'll then know the yield you require, and can then go looking for an asset allocation that suits your needs. You may find that:

• You can accept lower yield / less risk than you thought
• Adding 1 year might significantly reduce your risk
• Current market prices actually work for you, to reach the FI date you expect
• You can't hit FI in the time you need at current yield, and waiting does make sense

I hope you will find a spreadsheet that eases your fears. I know it works for me

[Farm_or]

Good points. I have been very risk averse most of my life too. When you suffer a 50% loss, it takes 100% gain just to break even.

In my twenties, I had the experience of training a gentleman in his sixties. He was previously employed by hp, but lost most of his retirement plan. He told me that he was following his advisor who told him "ignore the news and let it ride."

That cemented my responsibility to watch the big picture. I avoided the 2008 crashing because I pulled out in 2007.

Most experts recommend against timing the market. However, when there's a lot of indicators that things are getting over valued, I still hide when the macro data indicates a strong current against gains.

Nothing ventured, nothing gained, but you can still limit your risk by staying informed and failing on the scale that is a learning experience instead of a crushing defeat.

I think you are on the right track.

[Chad]

The real issue is the cash buildup, currently at above 100k. My income-related activities currently leave me little time to read, so I haven't been able to get enough of an understanding of investing and investments to feel comfortable picking stocks or even sectors. I expect my accumulation phase to last a few more years in which this constraint on my time will remain the same, though I'm already thinking about how to phase into part-time work (although I genuinely enjoy my job).

Time. This is the first question you have to answer. If you don't have time you have to do some type of system that is already planned for you.

[Gilberto de Piento]

Another way to think about it: you are losing money due to inflation when you hold cash.

I'll second the recommendation for index funds based on your limited time to research. For books to read on indexing try Common Sense on Mutual Funds, The Little Book of Common Sense Investing (similar to the previous book but shorter, from the same author). You could also check out the bogleheads forum but you will only get one opinion there so do your own thinking. A Random Walk Down Wall Street is also good but more about investing in general.

[Sclass]

My income-related activities currently leave me little time to read, so I haven't been able to get enough of an understanding of investing and investments to feel comfortable picking stocks or even sectors.

The bottom line is I've read just enough on investment in books and this forum to know I don't know anything and how to avoid the obvious mistakes, but not enough (I feel) to make wise choices, e.g. I consider myself just beyond mount stupid (known unknowns).

Ok I'm going to be the odd man out (edit-I'm not, sane advice in other replies). So I just read what you said above. What if that was your hedge fund prospectus that you just slid across the table to me and said, "ok Mr. Sclass our minimum investment is $100k, are you ready?" Heck no I wouldn't be ready. I'd tell you to get lost. What changes when it's you asking you to invest in your idea?

So you're uneasy. It sounds like you know enough to be dangerous to yourself. Investing in individual stocks can hurt you. It is like any powerful tool. Just because we are all staring wide eyed at a rally doesn't change that.

Get and pay for some management. Either investment planner, or mutual fund, or if you want to do it light, broad index fund or robot adviser.

Keep 10% of your money on the side to buy individual stocks. You likely will lose a portion of it depending on what you do. Hopefully you will learn things and continue with increasingly better results as time goes on. Then increase the stakes.

I started thirty years ago with a broad index fund from a reputable vendor. I slowly closed out the position and migrated the money into individual stocks as I got wiser. Wiser by reading, observing and losing money. Thankfully I always seemed to survive to play again and I didn't get demoralized.

I have a lot of stories about friends who lost big chunks of cash just jumping in to a rally with no prior individual stock investment experience. Then quitting forever. More boring sclass stories so I'll spare you. I'll just say it didn't end well.

Start out with small amounts. Large enough to sting (when you blow it) so you'll actually pay attention and learn. But small enough to be recoverable.

[radamfi]

Does peer to peer lending exist in Germany? That might be a midway option between "proper" investing and having cash in the bank.

[SilverElephant]

@Chris: The cashflow focus occured to me before, but I thought to myself "buying x rate of cash flow at lower prices would be better than at buying it at higher prices, right"?

@radamfi: I had a quick look and it appears there are least some European platforms that are open to Germans (some in Switzerland, for example). My issue is not so much a general mistrust of "proper" investing, as you put it, but rather my difficulty at jumping into the water, as it were, knowing what there might be down there but so far not having enough information on where to jump.

@Sclass: Well I wasn't really pitching myself an investment idea - quite the opposite. I remember Warren Buffet's comment on the "circle of competence" and I'm fairly certain that mine - though probably larger than most people's - is still rather small when it comes to investing. If I'm reading your advice correctly, it mostly falls in line with what other people here have offered - put most into broad index funds ("boring" investments) and keep a tiny portion on which to build experience?

In general I'd say my problem isn't that I don't see the absolute wisdom of that - it's just that, one step further, I'm wondering if buying an overvalued broad-market index fund right now isn't a mistake in itself?

[slowtraveler]

Asset Allocation is what protects you in that situation. Use a conservative allocation-ie-permanent portfolio.