One for the Perpetual Fencesitter
Amar is a CFA Charterholder and CFP, having over 20 years of experience in IT and Financial Services. He is very passionate about spreading financial literacy and has authored four bestselling books on Personal Finance.
28 Aug, 2017
People generally differ from one another based on their traits. But there is one trait that is common to many of us; rushing at the very last minute to file income tax returns or hurrying to invest in tax saving in January or March end are experiences almost everyone has gone through. If not personally, most of us at least know of someone who has gone through this.
The general tendency is to procrastinate knowing that there is a lot of time left. All that this results in, is the work remaining incomplete or having to undergo a last-minute scramble to complete it. However, the basic fact remains that the more time you have to complete a task, the less pressure you feel to complete it as soon as possible.
Inaction is one of the most common and basic mistakes I’ve seen investors make, in all my years in the field of finance. It’s not just what you do that might hurt you financially; often, it’s what you don’t do that ends up hurting you more. This phenomenon is called ‘decision paralysis’, mainly because it’s responsible for any financial blunder of inaction.
One of the most common areas where this theory comes into play, is that of purchasing real estate. Let’s take the case of Sanjay Mane, who has been paying more for his inactions than his actions. As an advocate of looking at a property objectively prior to purchasing, he doesn’t even bat an eyelid while buying an expensive club membership, which he barely uses.
His list of financial infractions doesn’t end here. Sanjay wanted to buy an apartment of his own but the timing was such that market prices were rising. He was advised to go ahead and purchase the property anyway, if he was planning on living there. But the high prices put him off and in the process of negotiating for the lowest price, he lost out on an apartment he liked. This whole process was repeated multiple times, at the end of which, prices had shot up considerably and a harder interest rate regime was beginning to rear its head. Several frustrating attempts later, he ended up buying an apartment at the almost 250 times the starting rate. It doesn’t take a genius to deduce that his loss in terms of opportunity cost was significant. Despite this, he didn’t learn or change his investing habits.
Another alarming mistake Mr. Mane committed was that he made all his decisions on his own, with little to no advice from anyone else. His first string of advice came from his brother, friends, CA, broker, financial planner, etc. Unconvinced by their advice, he then looked to business channels and read newspapers to make his decisions. All this resulted in was Sanjay behaving like a perpetual fencesitter, whose inactions resulted in a lot of losses.
Everyone ends up being a victim of decision paralysis from time to time. Here are a few situations that might give an indication if you are indeed becoming a victim.
- You delay making investment decisions.
- There is constant confusion about what investment choices must be made. Often the confusion persists even after the investment has been made.
- Always waiting for the market to fall to buy stocks and mutual funds at a lower price but never actually purchasing anything, further waiting for the lowest price.
- Gathering a lot of information on making investments from multiple people but never using any of it constructively.
There are certain guidelines that can be followed to ensure you avoid this trap.
- If you feel indecisive about the right time to invest, starting a systematic investment plan makes sense. This is because in the long run, there is no real benefit in timing the market.
- Question yourself whether making or avoiding making the decision today will affect your future.
The point of this post isn’t to push someone into making a hasty decision. It’s simply to explain that there needs to be a cap on the time taken to arrive at a decision. Sometimes, you might end up in a better position, even with an imperfect decision, instead of no decision. As Mark Twain once said, “Twenty years from now, you will be more disappointed by the things you didn’t do than by the ones you did do.” This holds true for your financial decisions as well and you would do well to remember it.