The Real Reason You May Be Waiting Too Long to Invest
Most people know that investing is good for their financial future. Compound interest can help you grow your nest egg over time.
But even people with a solid understanding of financial markets and their benefits can “analyze the handicap” and fear making mistakes. Cognitive biases can act as barriers that prevent people from starting to invest, and hold them back for too long. Understanding those different choices, however, can help you overcome them.
Bias 1: Analyzing disability
It’s natural to want to hunt for the perfect stock at the right price, but if you wait for those conditions to be met, you can miss out on many investment opportunities. Instead, set a regular investment plan, which will take emotion and overthinking out of the plan.
The easiest way to do this is to automatically invest in a low-cost index fund such as a major benchmark such as the S&P 500. That way, you buy more stocks each month and gradually build your nest egg without ever having to log into your brokerage account.
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Bias 2: Loss aversion
Loss aversion is a bias that expresses how the pain of a small potential loss outweighs the pleasure of a potential gain. Your portfolio will likely see red days, but that’s a normal part of investing – no reason to sit on the sidelines. Fluctuating market dynamics and news cycles can cause people to adjust their investment strategies and ignore the basics, which can cost them huge gains.
You can use the aversion to losing to your advantage when you’re on the sidelines. Instead of thinking about how much money you can lose in the stock market, think about how much money you will lose by keeping your cash in a bank account. Traditional checking and savings accounts are not designed to keep up with inflation.
Multiple investments can beat inflation and make it easier to retire on your terms. Changing the argument of losing the reduced purchasing power and considering the opportunity cost of sitting aside can cause smart investors to invest more.
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Bias 3: Illusion of sunk costs (of time)
The sunk cost illusion causes people to stick with their current strategy if they commit to it for a long time. This manipulation causes some investors to hold on to losing stocks for long periods of time, even if fundamentals worsen.
This same trick applies to people on the sidelines waiting for the next market dip. Some people believe that a big wind, such as inflation or prices, will lead to a market correction. However, in the midst of all that waiting, the S&P 500 could end up higher. This situation can make the investor feel like he made the wrong decision by sitting on the sidelines, and may wait for another market correction to happen.
Investors can counter this concern by averaging dollar costs, or investing large sums of money over time. It is generally better to invest in the stock market each month than to try to time the market with a large sum of money.
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