Inertia can be your worst enemy when it comes to self-managing money. How many times have you felt the compelling urge to make an investment decision, but failed to follow through? In this article, we discuss why we suffer from inertia. We also discuss how you can moderate such behaviour.

Behavioural biases

You may be willing to set aside 20-25 per cent of your monthly income towards meeting long-term goals. But you do not convert your desire into action. Several months go by and you are yet to purposefully save towards achieving your life goals. Why?

Often, our inaction to save is attributed to our desire to enjoy the present. Behavioural psychologists call this ‘present bias’. It is indeed true that we prefer to enjoy the present even if it economically affects our future lifestyle. But present bias is not the sole reason why we suffer from the inertia to save for the future. There is also ‘regret aversion’.

You do not know today whether your decision to invest in an equity mutual fund will help you achieve your life goal, say, 10 years hence. What if the mutual fund significantly loses value during the 10-year period? You would suffer from regret. Your mind forces you to sidestep this feeling of regret you could possibly face in the future by not taking an investment action today.

Another reason is the paradox of choice. Contrary to common perception, too many investment choices are not good. In fact, more the choice, more difficult is the decision-making. And that is a problem you face when it comes to investing in active funds. There are many active funds to choose from, notwithstanding the consolidation of products offered by mutual fund companies following the recent SEBI directive.

What if the active fund you select underperforms its peer universe? The fear of choosing the wrong fund leads to inaction. Then, there is the modern-day version of Gresham’s Law, which states “trivial matters are handled promptly; important matters are never solved”. You decide to attend to your personal finance (important matters) the coming weekend. But you are unable to do so because of unexpected work (trivial matters). Before your realise, a year has gone by and you are yet to take action.

What should you do to moderate, if not overcome, such behaviour?

Mind games

You have to trick your mind from falling into inertia to take investment actions. First, engage your spouse, a friend or a family member to implement your investment ideas. This way, you can overcome Gresham’s Law.

What about regret aversion? You can moderate this bias by setting up a systematic investment plan (SIP) on an equity fund. An SIP can be set up as an automatic debit to your bank account. Suppose you set up an SIP for 36 months. You have to overcome inertia only once — when you start the SIP. Thereafter, the automatic debit distances you from the investment decision, helping you moderate regret aversion.

Finally, what about paradox of choice? It is indeed difficult to overcome inertia that comes from decision-paralysis due to plenty of investment choices. However, there is a solution if you can give up the urge to choose an active fund. Consider investing in an index fund instead. Index funds benchmarked to the same index only differ in the proportion of cash they hold in the portfolio and the fees they charge unit holders. It is, therefore, easy to choose an index fund as the peer funds’ returns will be similar. So, trick your mind, overcome the inertia and set up SIPs.

The writer is founder of Navera Consulting. Send your feedback to portfolioideas@thehindu.co.in

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