Beware of Inertia and Analysis Paralysis

Chandan Sengupta

Physician's Money Digest, November30 2003, Volume 10, Issue 22

A statistic I recently came across shocked me.According to a study by Hewitt Associates,of the 68% of US employees with retirementaccounts, just 1 of 6 made a change of anykind in their investment allocation last year (ie, movedmoney from 1 fund to another within the plan or redirectednew contributions to different funds).

This may sound good. After all, we're supposed to belong-term investors, and the fact that people are notmaking changes to their retirement portfolios all the timeseems to be in keeping with that tenet. It would be, if theoriginal fund selections were made after proper analysisand there were no big changes.

The reality:

Most people set up the initial allocationsin their retirement portfolios without muchthought or analysis and then leave things on autopilot.The result is that allocations in most people's retirementportfolios are off-kilter. Everyone makes sporadicresolutions to do something about neglected investments,but generally, nothing gets done because of 2reasons: inertia and paralysis by analysis.

Recognizing Standstills

Overcoming inertia in any aspect of our lives is achallenge. It's easier to leave that cluttered, overflowingcloset alone than to commit the time and work it willtake to clean and organize it. Most of us dread havingto make hard decisions about throwing out that collectionof vinyl records not listened to in decades.

The situation is similar with people's retirementportfolios. Most people rightly believe that they don'tknow much about investing. Especially after therecent market debacle, they don't think they can trustprofessionals or their own gut feelings, and they'reafraid that any decision to clean up the investmentcloset may be wrong. So they find it easier to pretendthey're too busy now and postpone any action untilanother day in the future.

However, sooner or later, everyone is forced to overcomethe inertia because, unlike a cluttered closet,finances can't be left cluttered and closed forever. Thisleads to the second obstacle, paralysis by analysis.

Once people decide that they're going to learnabout investing and do it right, they start reading thefinancial sections of the newspapers, subscribing to afew financial magazines, buying investment books,and maybe even attending local investment managementand financial planning seminars.

But this tends to lead to massive confusion,because much of what they read or hear is contradictory.They hear some experts predict the market isgoing to go up, while others predict it will go down.The more they try to learn and the more analysis theydo, the more confused and paralyzed they become.

Kicking into Gear

To change this stagnant cycle, start by reading only 1or 2 good books on investing. Choose the right booksand read carefully. Then decide if you're going to do theoverhauling on your own or if you'll hire a financialadvisor to help. Be honest about whether you have theaptitude, time, interest, and temperament to do it onyour own. There's no reason to believe this will be easy;there's a lot to learn. If you decide to do it on your own,hit the books seriously. Don't believe that you canbecome a good investor by reading a few magazine articleswhile watching football.

If you decide to work with a financial advisor, afteryou have read the 1 or 2 books, put all of your energyinto finding the right person. This isn't an easy undertaking,either. While you can find all sorts of lists ofwhat questions to ask or what to look for in a financialadvisor, finding the right person will take a lot of workand some luck. Still, this will take less time than doingit on your own, but it will cost money. Find the besttrade-off for your situation.

Chandan Sengupta, author of The Only ProvenRoad to Investment Success (John Wiley; 2002),currently teaches finance at the FordhamUniversity Graduate School of Business and consultswith individuals on financial planning andinvestment management. He welcomes questionsor comments at chandansen@aol.com.