Why do people stay away from investment? | Algo – algorithmic trading

Why do people stay away from investment?

I always observe conversations about investment. Lately, I have noticed that many people avoid investment. For example, the Danes, who have even had a negative deposit rate for a long time, still deposit lots of money into their bank accounts and do not invest. Recently, they have beaten their bank account deposits record. A similar situation is going on here in Lithuania. I have tried to analyse the reasons why. One of the main reasons is risk. It turns out that people tend to evaluate risk in terms of fear. Some fears are reasonable and widely analysed; others, unexpected.

The most popular fears are market distrust and fear of financial crisis. Both the local and worldwide media are full of negative information which increases doubts for investment – the financial crisis of 2007-2008, the Euro crisis, Brexit, China’s economic slowdown, mistrust in US President D. Trump, and many more. Most people see only losses in crisis. Fewer have better insight and see possibilities of earnings.

Another common fear arises from lack of knowledge. It is natural that a person be afraid of something that he or she does not understand. However, it is not a necessity to be an expert to invest somewhere. It is important to observe that there is a wide range of choices of investments and to choose the one which fits your priorities the best. Nowadays, investments are not limited to real estate, bonds, stocks, and gold. One could invest to fund of funds, hedge funds, funds which are based on algorithms, start-ups, technologies, or exotic investments; for example, wine, plants, art, etc. Investment choices meet every taste. None of the types of investment are best or worst – they all have their advantages. I believe it is important to ask yourself, ‘What is the most appropriate way for a person like me to invest?’ and then gain some understanding in that area. The key is to be consistent, not to change investment types after your first unfortunate moments, and to constantly expand your knowledge.

Another fear is the fear of being deceived by professional consultants. Therefore, some people tend to invest only on their own. If they fail, then they tend not to invest anymore in any field. After this, they sometimes blather on about how risky and unrewarding investments in general are and how it is best to avoid them. In doing so, they increase the fear even more. Stories of failure are usually more dramatic than success stories; hence, failure is widely covered in the media.

An interesting fear appears to be the fear of embarrassing yourself when a professional consultant or investor discovers that you lack knowledge in investment. In such cases I would ask why it is so scary to show that you do not understand something. However, this matter should perhaps be dealt with a therapist or psychologist.

There is also the fear of doing anything else other than one’s profession. Some people tend to avoid areas in which they do not work and in which they are not professionals. They choose to keep cash or deposit money in the bank because they feel more secure that way. However, as I have already mentioned above, it is not a necessity to be an expert. You do not have to be a professional investor to choose the right fund, or the right consultant, or the right investment area.

The fear of the liquidity and of the volatility is common in many investment areas. For example, people are discouraged to invest in real estate because of illiquid, long-term investment, especially if the investor is not sure if he or she might need the invested money in the near future. Contrarily, investments with very high liquidity, for example, the stock market, tend to be very volatile, so people are also repelled by the idea that they might lose a significant share of their investment in a few days.

For those who are still willing to or who have already invested, I suggest taking into account three key indicators before any investment: return, risk, and liquidity. It is essential to observe the interconnections between all these indicators rather than to focus on one of them. The Sharpe ratio (return divided from risk) shows the real benefit of investment. High risk is not bad if high return is expected, and, on the contrary, low return is not bad if it comes with very low risk. Liquidity is also a certain risk which must be considered while measuring the total risk of investment.

The money deposited in the bank account inevitably depreciates; therefore, one should overcome the fear of risk and take a closer look at the very wide range of investment possibilities. Evaluate the return and risk ratio and try to invest by yourself, trust an investment advisor/fund, or do both.

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