By Fiona Leung on Mar 31, 2020
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 is 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 the affect 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 who 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 adjustments to his portfolio after a two or three year run in the stock market could suddenly see his gains erased.
Its causes are mostly rooted in emotional behaviors with fear being the most prevalent – fear of loss, fear of failure, fear of the unknown, fear of leaving our comfort zone. 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 sheer laziness or 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. Motivation to make a change usually comes when we are inspired to take deliberate, measured action or are frightened into reaction. 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.
*This content is developed from sources believed to be providing accurate information. The information provided is not written or intended as tax or legal advice and may not be relied on for purposes of avoiding any Federal tax penalties. Individuals are encouraged to seek advice from their own tax or legal counsel. Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel. Neither the information presented nor any opinion expressed constitutes a representation by us of a specific investment or the purchase or sale of any securities. Asset allocation and diversification do not ensure a profit or protect against loss in declining markets. This material was developed and produced by Advisor Websites to provide information on a topic that may be of interest. Copyright 2024 Advisor Websites.