The Tyranny of Inertia
By acting knowingly and intentionally, we improve our chances of success.
“Nearly a third who rolled savings into IRAs at Vanguard in 2015 still had the balance sitting in cash seven years later” goes a July 22nd Wall Street Journal article entitled “The 401(k) Rollover Mistake That Costs Retirement Savers Billions.”
I read this in utter shock and disbelief. How could such an enormous mistake, so easily avoided, be possible? It defies all logic. While the consequences are purely financial, thinking only financially is insufficient. Rather, we must repurpose concepts from physics to understand what happened and how to avoid making similar mistakes. Don’t worry, there won’t be any math.
Inertia is clearly at play here. According to Sir Isaac Newton, “every object perseveres in its state of rest, or of uniform motion in a right line, except insofar as it is compelled to change that state by forces impressed thereon.” Simply put, an object at rest stays at rest, and an object in motion stays in motion, unless acted upon by an outside force. A ball sitting on a beach would remain so, until kicked or blown. Once moving, it would not stop but for friction with the sand and the surrounding air.
Though a quantifiable property of the physical world, inertia has parallels relevant to the practice of protecting and building wealth. Money rolled into an individual retirement account, as in our opening example, will sit, unmoving, in cash indefinitely until a decision (the outside force) is made to invest it. Similarly, once invested, money remains in motion until acted upon by a decision to stop the investment.
Depending on the circumstances, inertia may or may not be desirable. It is neither always good nor always bad. In the short run, not investing may be a good idea. In the long run, however, not investing is a terrible idea. No investment strategy is always good. Conditions are ever changing.
Deliberate attention is imperative. Elsewise, inertia dictates the default state even as the basis upon which decisions were initially made, or not, no longer prevails. If you are not watchful, inertia will cost you dearly, as it did for the 30% who never invested cash deposited into their IRA during 2015 while the stock market went on to return nearly 120% through 2022.
Overcoming inertia is challenging. To do so requires force. In the physical world, force is that kick or gust of wind mentioned earlier. In investing, force is a decision. Making that decision requires time, effort and mental energy. It is draining even in an optimal situation. Things are never optimal, however. Investment decisions are always made in the face of uncertainty and deciding poorly can have significant consequences. Cognitive biases such as loss aversion, confirmation bias, the sunk cost fallacy and a preference for the status quo, to name just a few, make it even harder. It is no wonder some decisions don’t get made.
Fortunately, we can borrow another concept from physics – friction – to help overcome inertia. Friction is the force that resists motion. If an object is at rest, it requires less force to move if we reduce friction. This is what Vanguard’s policy research recommends. Cash is deposited into an IRA and needs to be invested. By automatically investing the cash into a qualified default investment alternative no decision needs to be made. Any friction was eliminated. Such an extreme is unrealistic though. Usually, the best possible outcome is to reduce friction enough to ease the necessary decision.
Conversely, if an object is moving we need to increase friction to stop it. Once an investment decision is made it will remain in effect until another decision is made. Even if the decision is to do nothing, increasing friction to force a decision prevents an investment made in one set of circumstances from unknowingly continuing long after circumstances have changed. A scheduled, periodic review of your investments, whether it appears necessary or not at the time, can prevent this.
There are a myriad of ways to control friction to overcome inertia, limited in scope only by your creativity. The inertia-friction concept is also applicable to many different aspects of life. Perhaps you are looking to form a new habit or stop a bad one. Or maybe you are trying to generate change in your community, business or some other organization. It can even be used effectively as a sales tactic or business strategy. Why else does everything seem to be paid for via monthly auto-renewal these days? Regardless of how or where you employ friction to your advantage, simply being aware of inertia and its great, though often overlooked, power is a step in the right direction.
Protecting and building wealth requires making good decisions. The chief prerequisite for making a good decision is to make a decision. Inertia, a concept from physics describing the tendency for objects to stay in their present state until acted upon by an outside force, helps us understand why necessary decisions sometimes do not get made. Whether the neglected decision is a choice to start doing something or a choice to stop doing something makes no difference. The long-term consequences can be meaningful.
Inertia is overcome by manipulating friction to your advantage. When a decision must be made, reducing friction makes it easier for that to actually happen. When a decision has already been made, increasing friction ensures it remains the correct one rather than remains so by default. By acting knowingly and intentionally, we improve our chances of success.
Thoughts? I would love to hear them. Email me at investmentinsights@zuckermaninvestmentgroup.com.
Written By Keith R. Schicker, CFA