Realize the Price of Investment Inertia

Physician's Money Digest, August15 2004, Volume 11, Issue 15

Most of us succumb to investment inertiawithout realizing that it can cost us hundredsof thousands or even millions ofdollars over the years. And since much ofthis cost may be the result of lost opportunities ratherthan actual losses, most of us don't even realize thecost can be so high. After all, who can keep track ofhow much money they're missing out on, when keepingtrack of actual gains or losses is hard enough?

Contributing Factors

There are three major causes of investment inertia.First, because most of the time there are no deadlinesfor investing or immediate consequences forputting it off, it is easy to keep postponing for weeks,months, and even years. What's worse, most of usfeel the urgency to jump into action exactly at thewrong time—when the market is being irrationallyexuberant—because we cannot resist the temptationto join the herd.

Second, our lack of investment knowledge holdsus back. Because we don't know enough, we don't feelcomfortable making decisions and taking action. Butgaining investment knowledge seems like a dauntingand time-consuming task. Also, many of us carryaround vivid memories of how we got badly burnedthe last time we took action.

Third, and this one is subtle but very important,most of us are not aware of a key characteristic ofstocks and the stock market, which can make inertiavery expensive. Unlike bonds and many other investments,stock market returns do not come in steadystreams. Instead, most of the time stocks and themarket go up in sharp spurts over a few weeks ormonths, followed by long periods of sideways movementsand downturns.

Steps to Success

Worthy consideration:

How do you overcome investment inertia? Thefirst step is to recognize the importance of overcomingit. If most or all of yourmoney is sitting in money market or short-term bondfunds and the stock market goes down, you may feelgood that you didn't lose any money. But if you continuewith that strategy, you will almost certainlymiss out on making significant amounts of moneyover the long run.

The second step is to recognize that your inertiamay be primarily the result of your lack of investmentknowledge, which makes you feel uncomfortableabout making investment decisions. Therefore, decideif you are going to manage your investments on yourown or seek professional help. If you want to do it onyour own, embark on a serious program of educatingyourself thoroughly in all aspects of investing.

Acquiring the necessary knowledge will take a lotof time and work, and you will have to overcomeinertia there as well. But you should find it much easierto motivate yourself to do that than to makeinvestment decisions without proper knowledge. Behonest with yourself. If you don't have the interest,aptitude, or time to become knowledgeable aboutinvesting, put your time and effort into finding theright financial advisor.

Investor reminder:

Keep in mind that overcoming your investmentinertia doesn't mean that you should jump into thestock market overnight. Start by creating a comprehensiveinvestment plan and designing a properlydiversified portfolio, and then implement them inmeasured steps. Of course, youneed to overcome your inertia and put all of yourother financial affairs (eg, retirement and estate planning)in order too.

Chandan Sengupta, author of The Only ProvenRoad to Investment Success (John Wiley; 2001)and Financial Modeling Using Excel and VBA(John Wiley; 2004), currently teaches finance atthe Fordham University Graduate School ofBusiness and consults with individuals on financialplanning and investment management. He welcomesquestions or comments at