Behavioural economists and financial planners have long warned that the common behavioural trait of inertia can be highly detrimental to investors.
Inertia and procrastination often seem to get in the way of investors beginning to seriously plan and save for retirement.
Most of us would recognise, for instance, that making extra salary-sacrificed contributions to super during our working years is in our best long-term interests in most circumstances. Yet even with the best intentions, we may never quite get round to it. In other words, we procrastinate.
And while most informed investors understand that their portfolio should be regularly rebalanced to ensure that their investments do not drift away from their long-term target or strategic asset allocations, actually doing it is another thing.
The list of ways that inertia and procrastination can act as a barrier to wealth creation seems almost endless.
Indeed, US behavioural scientists Richard Thaler and Cass Sunstein, among other academics, have long studied ways to try to overcome inertia and other potentially detrimental behavioural traits. Their 2008 classic book, Nudge: Improving Decisions about Health, Wealth and Happiness, advocates ways to give individuals a "nudge" to act in their own best interests.
Interestingly, however, there are times when inertia and procrastination do not always work against an investor’s interests. Steve Utkus, director of the Vanguard Centre for Retirement Research in the US, makes this point in a recent blog, Inertia, Procrastination and Volatile Markets.
While Utkus writes that inertia and procrastination can "undermine good long-term decisions", he recognises that these traits can also be "benign" in some circumstances.
"A case in point," Utkus comments, "is investor reaction to recent global stock market volatility. During the latter part of August, a slowdown in economic growth in China led to a share increase in stock market volatility in China and around the world.
"The fact remains that despite the surge in activity among some investors, the overwhelming majority made no portfolio changes in choppy markets," Utkus explains. (This conclusion is based on movement of money between investment options in Vanguard’s defined contribution pension funds in the US.)
As Utkus emphasises, most investors during this recent bout of volatility "stayed put and let inertia rule".
Perhaps the bottom line for investors is to acknowledge the potentially high cost of inertia while recognising that it can be in their interests during intense market volatility to resist an urge to take decisive action.
An urge to take decisive action in a particularly volatile market may lead to hasty, poorly-informed and emotionally-driven investment decisions.
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Robin Bowerman is Head of Market Strategy and Communication, Vanguard Australia. As a renowned market commentator and editor Robin has spent more than two decades writing about all things investment. |
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