Remember the class XI physics class? The first few words that would come to your mind are velocity, quantum, motion, gravity etc. Inertia is one of these not so simple terminologies of physics. For those of you who did not read physics in class XI, inertia is basically a tendency of doing nothing or remain unchanged. It can be synonymously used with words like inactivity, passivity or inaction, etc.
In this article
What is investor inertia?
Joining the two terms investor and inertia simply gives the meaning an investor who is in the state of doing nothing, not investing or procrastinating investments or have been passively dealing with the investments. Investor inertia is not a matter of physics but a grave subject in investment behavior which has led to the downfall of many successful investors. Investment inertia essentially is an enemy of decision making which is generally critical in nature and often leads to loss of opportunity and financial doldrums.
What causes investor inertia?
Investment inertia is a product of bad investment behavior in which ‘fear’ is the biggest culprit. Investors, however, seasoned they may be, generally feel the fear of loss, fear of the unknown, fear of failure and most importantly the fear of change. This fear of change or being subjected to a situation which is out of the comfort zone leads to many lost opportunities.
Fear in different stages of being invested
For example, a new investor fears complexity in investing, timing the market, understanding the psyche of market and stakeholders etc. investors who hold a lump sum amount to invest in the market fear of losing it in totality due to the volatile nature of the stock market. They are afraid of making any wrong decision with money. Investors who have already faced a crashed market or recession fear the same situation and opt for fixed return instruments. There are different levels and types of fear which attack any investors at any stage of being invested or even before they do so.
Apart from this, the biggest culprit to investor inertia is the habit of delaying or procrastinating things. People who are too comfortable in their skin or their current status quo resist any and every change that comes their way even if that means losing onto a golden chance.
Consequences of investor inertia
Investor inertia hits really bad when later on you find yourself at the same level of being rich as you were a few years ago and you peer investors have paved their way to being super-wealthy. Not only wealth creation but also the personal finance of an individual and hence a family gets adversely affected by the consequences of this behavior.
Imagine a scenario when you and your friend tracked a particular stock to buy and waited for it to come its lowest best; your friend made a swift move and bought 100 shares of that stock and you are still waiting for a day to come when the then lowest best won’t be the lowest best and a new lowest best would arrive (while the stocks are already rising). To your good luck, a few months late the stocks fell again, even lower than the price your friend bought at but you still are not sure if you buy must it now? While you are still waiting; the markets again entered the upwardly phase and the share price reflects green now. What is this happening? It is sheer indecisiveness on the grounds of fear, uncertainty and procrastination.
Not only did you lose a golden opportunity to invest in your choicest shares but also have fallen prey to the bad investment behavior, investor inertia.
Continuing the above example, can you imagine how badly would this lost opportunity cost you?
Let us say your friend bought those shares at Rs. 264 per share and bought 100 shares, so she invested Rs. 26400 at that time. Now that the markets have entered a bearish cycle, the share price for her stocks is Rs. 412 per share, resulting in a total corpus as on date to be Rs. 41200 and returns equal to Rs. 67,600.
This is one such example which has the power to make an impact worth Rs. 68000 (rounded). What if your inertia continues and you keep loosing such opportunities leading to stagnation of your wealth and only regrets left to you.
Lowered Investing Morale
The most drastic of all is the lowered investing morale. As the realization of losing excellent opportunities dawns on an investor, the morale fades out for investing further. This is nothing but a by-product if investment inertia which you must overcome in all possible ways.
How to overcome investor inertia?
By definition, inertia is broken by some force or push or pull which is stronger than the inertia itself. Investor inertia also requires some intervention which may be either external or internal or both. The strongest and most effective intervention is self-motivation internally and competition externally.
Nobody but you can motivate yourself the best. It is only you who knows the shortcomings, the strengths, the weaknesses and how to use every quality to an advantage. Motivation does not necessarily come from a positive vector, there can be vectors like fear and jealousy which act as strong force to push you off your limits and work hard. It is up to you to identify what works best for you.
Behavioral finance research claims Goals to be one of the strongest driving factors to an investor’s success. Once you have set your goals and are committed to achieving them, there is no looking back. If you are not feeling this kind of pull from your goals, you must rework on them to make them SMART (Specific, Measurable, Achievable, Relevant and Timed or Tangible). Once your goals have clarity, you will feel highly motivated to achieve them.
If none of this is working for you, you must consult a financial advisor who can understand your situation and guide you out of it. An advisor is not only an investment expert but also a counselor who can well recognize and drive you out of any difficult investment situation.