7 Ways to Slay Your Fear of the Stock Market

Confident investor
Photo by Viktoriia Hnatiuk / Shutterstock.com

“No way, son. I worked hard for that money. I’m not about to gamble it away in the stock market.”

That was my dad, a child of the Great Depression and someone who, understandably, was reluctant to do anything with his money that didn’t involve either an insured CD or a T-bill backed by Uncle Sam.

Sound familiar? Maybe you know someone like him. Maybe it’s even you.

Humorist Will Rogers famously said, “I am more concerned with the return of my money than the return on my money.” Good logic, especially as one ages and becomes unable to rebuild a nest egg. But for anyone still working, sticking your neck out — even by a little — can make the difference between living large and barely scraping by when those golden years roll around.

Invest $400 a month for 40 years and earn 2% annually, and you’ll end up with around $300,000. Jack that rate of return to 10%, and you’ll have more than $2 million.

Think those extra dollars will make a difference in how, when and where you retire?

Of course, the only possible way to earn 10% on your savings is to take some risk by investing in things that might not work out.

While these types of earnings comparisons may be compelling, they’re probably old news to those unwilling to consider investing in real estate, stocks or other risk assets. So here’s another approach: a list of rules designed to help anyone minimize the fear of doing just about anything.

From investing in stocks to skydiving to asking someone out on a date, fear is not your friend. Here are seven universal principles that will help you keep it to a minimum.

1. Understand what you’re doing

If you’re going to invest in stocks, invest your time before investing a dime. Talk to people you know who have more experience. Learn what makes markets, and stocks, move up and down. Studying history will help you understand and predict the future.

So will understanding the rules of the game. And one rule of this game is that stocks will go down as well as up.

There’s an inverse relationship between knowledge and fear. The more you have of the former, the less you’ll have of the latter.

2. Understand why you’re doing it

With conviction comes courage.

When it comes to investing, you’ll be most effective when you accept that investing in the shares of great American companies has historically been a very smart thing to do, especially over long periods of time. And investing when others are running for the hills has proven smarter still.

You know the stock market is riskier than insured bank accounts, so it follows that if it didn’t return more than insured bank accounts over time, it wouldn’t exist. Thus, I’m convinced a part of my savings belongs in stocks, not despite the risks involved, but because of the risk involved.

The Standard & Poor’s 500 index, a stock market index designed to mirror the returns of 500 big U.S. companies, has averaged an annual return of about 10% since its inception in 1928.

3. Don’t overdo it

If you want to scare yourself to death:

  • Invest money you’ll soon need.
  • Invest more than makes you comfortable.
  • Or put your money in silly, speculative stocks that are more like gambling than investing.

Staring at the ceiling at night? This is why.

When it comes to investing in risk assets, you must never invest money you’ll need within five years, and never invest everything you have. One rule of thumb I’ve been advocating for decades is to subtract your age from 100, then put the difference as a percentage of your money in stocks. So if you’re 20, you can invest up to 80% in stocks. If you’re 80, 20%. If you’re nervous, invest less. It’s just a rule of thumb.

4. Plan for pain

It would be great if your stock portfolio, your house and every other asset you have went up in value each and every month. Unfortunately, that’s not the way it goes. But if you can accept that the potential upside of bull markets outweighs the potential downside of bear markets, it’s easier to stick with the program when times get tough.

I have a significant proportion of my net worth in stocks, so I know how it feels when things go south. But the decades I’ve spent as an investor taught me to expect the bad with the good. When stocks have been rising for long periods of time and become overvalued — and are thus likely to go down (like now) — I don’t adjust my portfolio, I adjust my expectations. Expecting a decline means that, when it comes, I’ll be prepared instead of panicked.

5. Listen to your voice, not everyone else’s

When it comes to investments, romantic relationships and lots of other decisions in life, develop your own voice and listen to it. If you like short people, date them. If you like stocks, buy them. If you want to live in Ecuador, move there.

People trying to steer you in one direction or another often aren’t as smart as you think they are, don’t know you as well as they think they do and may have personal agendas that don’t align with yours.

6. Consider the risk of not taking a risk

For the first few decades I invested in stocks, I mostly stood on the sidelines when times were bad, too afraid to make a move. Finally, however, experience taught me that when times are bad and everyone’s afraid, it isn’t the time to freeze. Instead, it’s the time to act.

When both the real estate and stock market tanked in the recent Great Recession, I invested a chunk of my savings in quality stocks and also bought a rental house.

Those two decisions, while scary at the time, have substantially increased my net worth today.

While there’s always a risk of losing money by investing in stocks, real estate or anything else that fluctuates in value, there’s also a risk in not doing so. As pointed out above, you’re unlikely to retire rich, or even adequately funded, if you earn an average income and are willing only to invest in guaranteed rates of return.

You can’t get a hit from the dugout.

7. Think long term

If you’re trying to invest short term, you might as well head to Vegas, where you can at least drink for free.

When I bought General Electric, JPMorgan, ConocoPhillips and other signature stocks back in 2009, I didn’t expect them to go up right away. But because these are some of the biggest companies on the planet, I knew they wouldn’t go bankrupt and assumed that sometime before I died they’d come back. In fact, had the market continued to tank and these stocks continued to fall, I was fully prepared to buy more.

If you combine quality with patience, it will almost certainly pay off sooner or later. I have no idea whether the market will go up, down or sideways tomorrow. It’s the flip of a coin. But I’d give 90% odds it will be higher 10 or 20 years from now.

The longer your time horizon, the higher the probability you’ll be successful.

About me

I founded Money Talks News in 1991. I’ve earned a CPA and have also earned licenses in stocks, commodities, options principal, mutual funds, life insurance, securities supervisor and real estate. If you like what you read here, sign up for our free newsletter.

Disclosure: The information you read here is always objective. However, we sometimes receive compensation when you click links within our stories.

Source: moneytalksnews.com

Mortgage vs. Cash: Which Is the Better Option When Buying a Home?

Last updated on November 21st, 2020

It’s been about eight months since my last mortgage match-up, so let’s give it a whirl again.

Today, the focus will be on taking out a mortgage versus simply using cash when purchasing a home.

Of course, it’s not that simple for the majority of the population to throw a few hundred thousand dollars (or more) down on a property. So for many, this won’t even be an option.

But it’s worth visiting regardless to see how even the very rich often opt for a home loan when they’ve got plenty of cash to spare.

Buying a Home with Cash Has Its Benefits

cash vs mortgage

  • Cash buyers are more attractive to home sellers
  • The home buying process can be a lot faster without a mortgage
  • Don’t need to abide by any mortgage lender’s rules
  • No property restrictions or inspections to worry about
  • Don’t have to pay interest to the bank for several decades

First let’s talk about buying a home with cash. This is almost certainly the favored approach of real estate investors and perhaps the mega-rich, though billionaires like Mark Zuckerberg still take out mortgages.

And investing gurus like Warren Buffett think the low mortgage rates are a great deal…

But for a large swath of the population, this either/or question doesn’t even get any consideration because most of us can’t afford to buy a home (or even a small condo) with cash.

Still, there are some advantages to buying a home with cash as opposed to taking out a mortgage.

The most obvious is that you don’t pay any interest when you buy with cash. That’s right, no mortgage, no interest payments.

Additionally, you don’t have to make any payments to principal either, seeing that you own your home free and clear right off the bat.

However, that doesn’t mean you won’t have recurring costs. You’ll still need to pay homeowner’s insurance (unless you’re really brave), along with property taxes and possibly HOA dues depending upon where the property is located.

The insurance thing becomes optional when you own your property outright. Not so if you have a mortgage because you don’t really own your home. Your lender does, until that loan is actually paid off in full.

Another plus to paying with cash is the negotiating power you gain when making an offer. If you’re going up against some other would-be buyers that need to finance the purchase, you’ll have the upper hand in pretty much every situation.

Sure, you could get outbid by another buyer willing to offer more for the home, but your cash offer should be king if all else is equal. And it may still be king even if you offer less than the competition.

Once your offer gets accepted, you won’t have to worry about dealing with a bank or mortgage lender. That means it doesn’t matter if your credit score is in bad shape, or if you don’t have the necessary income to qualify for a mortgage. Or if you’re a foreign national who might otherwise have difficulty getting a loan.

There is still a process to purchasing the home, but you can cut out the middleman, otherwise known as the lender. And that means you won’t have to pay lender fees, including a costly loan origination fee, or lender’s title insurance, underwriting fees, and so on.

But you might not want to skimp on the appraisal, even though it’s not a requirement. It’ll buy you some time to determine if the house is in good shape and worth what you agreed to pay.

That lack of a mortgage also means you’ll be able to move in sooner, or rent out the property sooner. Speaking of renting it out, you won’t have to worry about occupancy issues, or a higher mortgage rate because it’s an investment property.

Taking Out a Mortgage, Even If You Don’t Have To

  • A lot of very rich people take out mortgage loans
  • Not because they have to, but because they know home loans are cheap
  • Instead of tying up all their money in a single property
  • They put their hard-earned cash to work in other investments that can yield better returns

On the other hand, there’s the traditional approach to buying a home, with the help of a mortgage.

This is kind of the default option more out of necessity than preference. As I alluded to earlier, most of us can’t afford to buy real estate with cash. We need a mortgage to get the deal done.

In fact, many Americans need a sizable mortgage to get the job done, with practically zero-down FHA loans a popular choice for a large number of prospective home buyers.

So like it or not, a mortgage is often just a fact of life.

The number one downside to a mortgage is all that interest. On a $200,000 loan set at 4.5%, the total amount of interest due over 30 years is close to $165,000. Y

eah, you pay nearly double what you agreed to pay for the home. Sounds pretty rough, doesn’t it?

But like I said, this is the price of not having a substantial amount of money to put down. Along with that, you also have to pay a bunch of lender fees, which can certainly add up.

If you put down a very small amount, you’ll also be subject to paying mortgage insurance premiums, possibly for life if you go with an FHA loan and never refinance.

Oh, and you don’t just get a mortgage. You need to qualify for a mortgage, and not everyone qualifies for countless reasons. Having the lender pry into your personal and financial life may also be extremely annoying and frustrating, but if you need hundreds of thousands of dollars, they’ve earned that right.

The good news is that you write off that mortgage interest as long as you itemize deductions and they exceed the standard deduction.  So some of that interest can result in a lower tax bill each April, which lessens the blow pretty significantly.

Additionally, mortgage rates are dirt cheap compared to just about every other type of loan out there. Yes, you pay a lot of interest, but it’s only because the loan amounts are so large.

That means there’s a decent chance you can invest the money that would be locked up in your home (if you paid cash) at a better return elsewhere.

Having a mortgage on your home also means you’ve got more liquidity and less at risk, assuming something goes wrong.

Imagine something devastating happens to your home that isn’t covered by insurance. Would you rather have 20% invested, or 100%?

Also consider the recent housing bust – a lot of homeowners were able to walk away from their homes relatively unscathed because they didn’t have much invested.

Those who purchased all-cash could cut their losses, but they couldn’t walk away without losing a lot of money. There’s also that old saying about putting all your eggs in one basket.

If you don’t have money in other places, it certainly shouldn’t all be tied up in your home.

[Mortgage affordability calculator]

Can You Get the Best of Both Worlds?

  • Most home buyers put down a small amount of cash and take out a mortgage
  • The sweet spot might be a 20% down payment
  • This allows you to avoid costly mortgage insurance and obtain a low mortgage rate
  • You can invest your excess funds elsewhere or prepay the mortgage if that’s your goal

Absolutely. Most people buy homes with cash and a mortgage, not just either or. In other words, when you put 20% down on a house, you’re paying a decent chunk of cash and financing the rest.

As a result, you avoid the requirement for mortgage insurance, you get a lower rate of interest, and you have an equity investment.

Putting down 20% or more should also put you in a pretty good position when it comes to a bidding war, though an all-cash buyer willing to make a good offer will always have the upper hand.

Additionally, you can always pay your mortgage off earlier than planned seeing that most mortgages don’t have prepayment penalties anymore.

Sure, you will subject yourself to the closing costs associated with a mortgage, along with the qualifying process, but you don’t have to pay off your mortgage over 30 years.

If you decide your money isn’t earning as much as you’d like, you can move more of it towards the mortgage balance.

Got plans to retire in 10 or 15 years? Start prepaying the mortgage faster so you’ll be free and clear by the time you’re on a fixed income.  Or go with a 15-year fixed mortgage instead.

Remember, it doesn’t have to be an either/or discussion. You can make adjustments based on your financial standing as time goes on. With cash, you can also pull equity via a cash out refinance. So both options provide flexibility.

Advantages to Buying a Home with Cash

  • No need to qualify for a mortgage
  • No need to shop for a mortgage
  • No mortgage payments (good if you lose your job or are close to retirement)
  • No interest due
  • No lender fees
  • Homeowner’s insurance isn’t required
  • You don’t need to pay for an appraisal
  • More negotiating power when making an offer
  • Lower purchase price possible
  • Faster closing process
  • Could be a better return for your money than a low-yielding CD or bond
  • Set it and forget it investing (don’t have to manage your investments)
  • Can tap home equity if and when needed
  • Can always sell or take out a mortgage
  • Less hassle overall (one less thing to manage)
  • Sense of security because it’s your home!

Disadvantages to Buying a Home with Cash

  • Most of us don’t have the money required to buy a home with cash
  • Mortgage rates are a cheap source of financing
  • Real estate is an illiquid asset (not easy or free to sell)
  • The property could lose substantial value
  • You could lose a lot of money if your home is destroyed and not covered by insurance
  • You miss out on the mortgage interest deduction
  • Your return on investment might be poor relative to other options
  • Poor diversification if a lot of your money is in one single property
  • House rich and cash poor if savings get depleted

Advantages to Buying a Home with a Mortgage

  • Mortgage rates are very low
  • Mortgage interest is tax deductible
  • Inflation should make future monthly payments “cheaper”
  • You only need to bring in a small down payment
  • More cash on hand for anything else
  • Getting a mortgage isn’t really that difficult
  • A mortgage can actually improve your credit score
  • You can prepay your mortgage whenever you want in most cases
  • You can invest your money elsewhere for a better return
  • Your money is more liquid
  • Forced savings each month
  • Less risk if something happens to your home or if values drop

Disadvantages to Buying a Home with a Mortgage

  • Tons of mortgage interest must be paid
  • 30 years of monthly payments (maybe less, but still a long time!)
  • You need to shop for a mortgage
  • You need to get approved for a mortgage
  • You could get declined
  • More (lender) costs associated with a mortgage
  • Closing process more work and more time
  • You may buy more house than you should (get in over your head)
  • Harder to sell the property if little or no equity
  • You can lose your home if you fall behind on payments
  • You don’t actually own your home

Source: thetruthaboutmortgage.com