Why Waiting to Invest Is a Costly Mistake
Investing carries inherent uncertainty, and that uncertainty often breeds hesitation. Many investors struggle to act, whether the decision involves entering the market, rebalancing a portfolio, or trimming a concentrated position. Inaction is itself a decision, and it carries real consequences.
Some investors assume that a strategy that has worked so far will keep working indefinitely. But markets evolve, and failing to adapt leaves your financial future to chance. Rather than postponing action out of uncertainty or fear, you can weigh the facts and make decisions based on probabilities, not emotions. This commentary examines the most common ways hesitation shapes investment decisions and what to do instead.
Daily Distractions and Analysis Paralysis
Daily distractions rank among the top reasons investors hesitate. Life gets busy, and everyday concerns often crowd out long-term financial goals. Yet looking back over a 10- or 20-year period, only a handful of key decisions move the needle.
Analysis paralysis compounds the problem. The volume of news that floods inboxes, phones, and TV screens each day can overwhelm anyone’s ability to process information and decide. Fundamentals change far more slowly than market prices or the 24-hour news cycle, and most daily headlines have little bearing on a long-term financial plan. Investors who wait for a perfect moment may wait forever, since no such moment exists. Markets offer no perfect solutions or magic bullets, and waiting can mean lost opportunity. Acting on an informed decision quickly may be more beneficial than prolonged indecision in some circumstances.
Market Volatility Fuels Hesitation
Market volatility drives inaction more than almost anything else. Rapid price swings can rattle even experienced investors. Price declines can spark a fear of loss, driving investors to delay investing or, worse, panic-sell valuable long-term assets at short-term lows.
Steep swings are more common than most investors assume. Since 1979, the S&P 500 has posted an average intra-year peak-to-trough decline of 14.1%, yet the index still finished 34 of the last 45 years with a positive return, according to Savant’s analysis of stock market corrections. Even so, some investors delay deploying capital, preferring to sit in cash and invest only after a steep decline. Historically, remaining invested over long periods has often benefited investors. Sitting in cash might feel safe, but inflation quietly erodes purchasing power over time, as the International Monetary Fund explains in its overview of inflation.
Conversely, periods of rapid price appreciation can trigger an equally misguided fear of “missing out.” When it seems like everyone else is getting rich overnight, greed can spark a herd-like rush into assets that don’t suit an investor’s long-term goals or that trade well above their true value. DALBAR’s long-running Quantitative Analysis of Investor Behavior study has found for years that many retail investors underperform the very funds they invest in, largely because they sell at low prices out of fear and buy after periods of price appreciation, precisely when forward-looking expected returns are lower. The more actively investors trade, the more challenging it may become for some investors to achieve long-term investment objectives.
Hesitation also shows up around taxes. Understandably, some investors avoid realizing gains because they don’t want to trigger a capital gains tax, which the IRS imposes at 0%, 15%, or 20% for most taxpayers, depending on income, under current law. Tax efficiency matters, but it shouldn’t be the primary driver of investment decisions. Taxes are a known, tangible cost, which can spook investors into inaction, while risk often feels more abstract until it isn’t. Letting the fear of taxes dictate your strategy can lead to missed opportunities or losses when a concentrated position collapses.
Market timing, or jumping in and out of assets periodically in anticipation of future price changes, is incredibly challenging. Some investors believe they can jump in and out at the right moments, but even professionals struggle to do this consistently. Even if the timing works, frequent trading generates short-term capital gains, which the IRS taxes as ordinary income at rates that can run higher than long-term rates, potentially offsetting any benefit. A disciplined, evidence-based investment approach may help investors maintain a consistent long-term strategy and manage risk according to their objectives. Avoiding risk entirely isn’t realistic, but disciplined strategies that manage risk and volatility may add value over long periods.
Volatility can also be an opportunity when approached correctly. Some investors reflexively “buy the dip,” assuming every decline is temporary. But not every dip is a buying opportunity: markets often swing irrationally, sometimes undervaluing assets and sometimes overvaluing them, and reacting to short-term swings can undercut a long-term financial plan just as easily as panic-selling does. Keeping your long-term financial goals in sight, not short-term price swings, is what truly helps you build value. Take the amount of risk needed to meet your financial goals, but not much more. Overstepping into more risk than you’re comfortable with, or beyond what current fundamentals and risk-reward can justify, may increase the likelihood of outcomes that are inconsistent with your long-term objectives. Inevitable bouts of market volatility and the fear or greed they provoke shouldn’t influence your asset allocation plan. Periodically rebalancing back toward your strategic allocation and adjusting it incrementally as life circumstances change remains vital to long-term success.
As always, we’re happy to discuss your investment strategy. Are you holding onto risky concentrated positions? Have you been waiting for the perfect time to invest? Are you adjusting to market movements thoughtfully? Reach out to Savant to discuss how your investment strategy aligns with your financial goals, risk tolerance, and personal circumstances.
This is intended for informational purposes only. You should not assume that any discussion or information contained in this document serves as the receipt of, or as a substitute for, personalized investment advice from Savant. Please consult your investment professional regarding your unique situation.