Does Investing Inertia Have You Trapped?
Investors are prone to many behavioral mistakes that can cost them dearly. Trying to time the market, trying to pick the winners, chasing returns, trying to go it alone are among the most common. But the one that can inflict the most damage over a period of time is when they succumb to investing inertia.
What is investing inertia? In physics, inertia refers to an object’s amount of resistance to change in velocity. Without some other force to affect it, an object will not change course or speed. If at rest, it will remain at rest; if plodding along in a straight line – it will continue to plod along. In a nutshell, inertia is the enemy of change. In personal finance, it’s a psychological affliction that can prevent people from making critical financial decisions often resulting in lost opportunities or financial stagnation.
Examples and Causes of Investing Inertia
Investing inertia can present itself in a number of ways and may effect many different aspects of financial decision-making. The most prevalent example is the average person who has yet to save a dime and keeps putting off establishing a systematic savings program. On the other extreme it’s the person who may be fully invested but has ridden the last two years of stock market gains without doing a thing to his portfolio.
Essentially, investing inertia is the status quo with which we’re most familiar and, assuming it hasn’t had any drastic impact on our situation, it always seems to be the safest route for many people. Never mind that it could cost the person who postpones saving tens or even hundreds of thousands of dollars over his lifetime; and the person who makes no portfolio adjustments or rebalancing after a two or three year run in the stock market could suddenly see gains erased.
The causes of investing inertia are mostly rooted in emotional behaviors with fear being the most prevalent. Investors who were caught in the market crash may find comfort in the safety of fixed yield investments. People with money to invest can become frozen in fear from too many investment choices. New investors may be intimidated by the complexity of investing and fear having to make a decision. Of course, it could be the result of procrastination which relies on the comfort of the status quo to justify inaction.
Overcoming Investing Inertia
Whatever the situation or the cause, investing inertia usually requires an intervention by some force, either internal or external to break its bonds. The strongest internal force is motivation. In personal finance, the strongest, most inspiring motivation comes from our own financial goals. However, financial goals need to be clear enough, important enough and desirable enough to inspire someone to develop a strategy and then adhere to it. Simply setting target dates and dollar amounts as goals carries no emotional weight; however, when you can visualize it and quantify it, it provides the emotional impetus for action.
The most powerful external force for disrupting investing inertia, aside from a stock market crash forcing you off the couch, is a conscience other than your own; and if it belongs to a qualified, objective, independent financial advisor, then all the better. To be sure, without a well-conceived financial plan, a comprehensive investment strategy to drive it, and a financial coach to keep you on track, nothing is likely to change.
