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.
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 rupee 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 thousands or even lakhs / crores of rupees 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.
Kishore has recently got married. His problem is that though he earns well, he is unable to save any money. He and his wife enjoy frequent outings, shopping and holidays. While Kishore has every intention of saving and investing some part of his income, at the end of the month, he is either left with too little money to invest or there is some money lying idle in the savings bank account. He can’t bring himself to make a financial plan and stick to the decisions associated with it. He always finds reasons to avoid doing that. What can Kishore do to overcome the problem he faces of not being able to put an investment plan in place?
Inertia when it comes to making investment decisions is a common problem faced by many people. For such people, the best way to ensure that some portion of their income is saved and invested is to make savings automatic. This does not require them to make frequent decisions or choices on where to invest and how much to invest.
There are various ways in which Kishore can put his saving and investment exercise on auto mode till such time he is willing to give it the time and attention it requires. He can use a salary deduction option with his employer, who might agree to deduct a fixed amount from his salary and use it make an additional fund contribution towards NPS, an insurance premium, or a mutual fund SIP. He can also give instructions to his bank to move money from his salary account into any investment avenue, including fixed deposits, on a given date. All of these options require Kishore to create a mandate for investing a fixed amount from his salary, before it is available for spending. After that it goes in to automode and creates an investment portfolio for him, requiring minimal action or decision on his part.
Since Kishore realises the need to start investing, he will be ready to make the one-time effort. The low involvement required from his side to keep the investment going will suit his current reluctance to participate actively in his investment activities. However, it can go on till such time he is ready to commit to a financial plan that lays down his saving and investment requirements given his financial priorities. However, he must realise that this is more of a stop-gap arrangement and he needs to get more serious about setting a plan, budgeting for it, investing the surplus and reviewing them periodically.
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.
