It is relatively common for people to be asked why they do not invest and use guaranteed savings tools. However, there is no reasoned answer. That is not by chance; it is a combination of bias and financial literacy.
Investment is not a compulsory action for everyone. Indeed, user profiles develop such high levels of risk aversion that they can’t consider exposure. However, for many small and medium-sized savers, it is simply a question of ignorance.
Why is there so much fear of investment?
In the first instance, the fear of investing comes from losing wealth. It is a mistake to think that the difference between those who trade and those who do not is that one does not mind losing assets and the other does.
No one likes to lose assets, but the investor knows that, in order to obtain a better rate of return, they need to take on larger risk positions. For the vast majority of investors, this is exactly the same: the lower the level of risk, the lower the return; the higher the level of risk, the higher the projected return.
But if the fear of rejection of loss is something that we all have, why do some people accept to invest and others do not? As we indicated initially, it is a mixture of biases and financial culture.
What are biases?
Biases are psychological characteristics that encourage us to behave in one way or another concerning our money.
They are not only found in investment but also, for example, in consumption.
In this case, different biases multiply the feeling of risk for the novice investor. They range from the most basic risk aversion to others, such as selective memory, which associates profitability only with asset protection, or victimization. It is assumed that investment is only for experts.
How financial literacy influences
In addition, financial literacy is a powerful tool. Someone who has acquired a certain level of financial literacy through reading and training can understand how investment tools work. According to their knowledge base and investment profile, they can determine which ones may or may not be suitable.
But, even more so, they will be able to challenge the biases that hold them back when making investment decisions.
Is there a way to break through this investor fear?
It is not easy. However, it is possible. There would be several tips that should be taken into account in this respect. The most relevant would be the following:
Never invest with money, which loss would be a serious financial problem. Similarly, do not use money from emergency funds or savings tools.
Do not choose complex tools for the first investments. It will be much more appropriate to invest in quiet products such as index funds than in the cryptocurrency market.
Access certain levels of training. It is not necessary to become an expert, but it is important to acquire some basic knowledge about investing in your tools. That is not complex and is currently available to anyone.
What is a pyramid scheme of income and payments?
A pyramid scheme is an economic model in which income is made constantly in exchange for the promise of regular partial returns, which are fed by new deposits from new customers.
That is a simple summary, but it is an economic model that has been used to defraud tens of billions of dollars, as was the case with Bernard Madoff, who organized a pyramid scheme that is alleged to have defrauded close to 70 billion dollars.
The system works as long as there is a constant inflow of new money and new clients. The interest is paid in part with the new inflows. Only until what is known as the breaking point. This is when the amount of money coming in is no longer sufficient to pay back the promised interest.
Generally, the breaking point is when fraudsters withdraw all funds and liquidate investments. After that point, it is usually impossible or very difficult to recover the funds.
How to distinguish a Ponzi scheme
First of all, we must use common sense. Most of these scams tend to use returns that are simply impossible for any other type of product as a hook. They may be promising 8% daily, 15% weekly, or any different kind of absolutely crazy return.
When the proposed returns are so far removed from reality, we should be suspicious in all cases, regardless of the type of investment they are offering.
Another way to distinguish pyramid schemes is to look at the models used to attract new money. Currently, they tend to use very similar systems that are based on encouraging the investor to attract new investors through rewards or referrals (something legitimate that is used in other business models) and use content creators or people who, through social networks, show the advantages of the product and the profits obtained, directly or indirectly encouraging investment.
Finally, they are tools that will promise segmented profitability with terms that do not allow you to withdraw all your money. If you try to do so, they will offer you reasons not to do it, such as increasing the profit, not charging certain commissions, etc.
For years I have studied American finance regulations. All the information in this blog is sourced from official or contrasted sources from reliable sites.
Salesforce Certified SALES & SERVICE Cloud Consultant in February 2020, Salesforce Certified Administrator (ADM-201), and Master degree in “Business Analytics & Big Data Strategy” with more than 13 years of experience in IT consulting.