The Real Reason You May Wait Too Long To Invest
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Most people know that investing is good for their financial futures. Compound interest can help you grow your nest egg over time.
But even people with a strong understanding of the financial markets and their benefits can be susceptible to "analysis paralysis" and the fear of making mistakes. Cognitive biases can act as barriers that prevent people from getting started with investing, and keep them on the sidelines for too long. Understanding those different biases, however, may help you overcome them.
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Bias 1: Analysis paralysis
It’s natural to want to hunt for the perfect stock at the perfect price, but if you wait for those conditions to be met, you can miss out on a lot of investing opportunities. Instead, put a plan in place to regularly invest, which will take the emotions and overthinking out of the process.
A simple way to do this is to automate investments into a low-cost index fund that mirrors a key benchmark like the S&P 500. That way, you buy more shares each month and gradually build your nest egg without having to log into your brokerage account.
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Bias 2: Loss aversion
Loss aversion is a bias that highlights how the pain of a potential small loss outweighs the excitement of a potential gain. Your portfolio will likely see red days, but that’s a typical part of investing — not a reason to stay on the sidelines. Volatile market swings and news cycles can cause people to adjust their investing strategies and ignore fundamentals, which can cost them significant gains.
You can use loss aversion to your advantage if you are 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 built to keep up with inflation.
Many investments can beat inflation and make it easier to retire on your terms. Shifting the loss aversion argument to reduced purchasing power and considering the opportunity cost of staying on the sidelines can cause smart investors to commit invest more money.
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Bias 3: The sunk cost fallacy (of time)
The sunk cost fallacy causes people to continue with their current strategy if they have committed to it over a long period of time. This fallacy causes some investors to hold on to losing stocks for too long, even if the fundamentals get materially worse.
This same fallacy also applies to people who are on the sidelines waiting for the next market dip. Some people believe a major headwind, such as inflation or tariffs, will lead to a market correction. However, amid all of that waiting, the S&P 500 may end up soaring. This scenario can cause an investor to feel like they made the wrong decision by staying on the sidelines, and they may wait for another market correction to take place.
Investors can counter this concern with dollar-cost averaging, or investing sums of money at regular intervals. It’s typically better to invest money in the stock market each month than to try to time the market with a large lump sum.
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