Investor Paralysis

It seems that there’s always a reason not to invest. Take the case of a hypothetical investment client, Bob Smith, who delayed investment action almost a year from the time he decided to hire a money manager to invest his $100,000 savings account and $300,000 in CDs. Bob knew that it was well past time to move from that low-interest bearing investment to the stock market, yet he couldn’t bring himself to take the plunge. Even after he found a money manager he trusted and planned to hire, he couldn’t bring himself to make the transition for several months.

First, the market started the year so high that surely it couldn’t last; it must be about to crash. Then, in mid-summer, it finally did. But no, Bob couldn’t invest yet – the market wasn’t bottomed out. Doesn’t everyone say that you should “buy low, sell high”? Then, in September, when it looked like things were leveling off, the market was too turbulent; it wasn’t safe yet to buy. Next, in early December when the market had rallied and seemed reasonably strong, he couldn’t invest yet again. Mutual funds distribute their capital gains at the end of the year and Joe didn’t want to pay taxes on someone else’s earnings. Maybe January…

If this scenario sounds familiar, you, too, may be a victim of investor paralysis. This paralysis results from the natural emotional seesaw between fear and greed: it’s always “too risky,” “too high” or “not low enough” to invest at any given moment. The results? Either the victim never invests, or he gets so frustrated by the process that when he finally does invest, he chooses his investments based on hearsay or emotions, not on objective criteria.

Bob could have saved himself from this dilemma if he had followed through on his initial instinct to delegate his investment decisions to a qualified money manager whom he trusted. When Bob did finally hand over this responsibility to his money manager, she quickly and objectively invested his assets in appropriate vehicles, more than doubling his previous return. Bob’s long year of investor paralysis cost him much more than frustration: it put him a year behind in meeting his investment goals.