Many investors are delaying crucial financial steps, including investing, due to a behavioural bias recognised as “complexity aversion” – the fear of the unknown and the belief that investing is too complicated. These delays can significantly impact long-term financial well-being.
Fear of making mistakes: Just like starting a new exercise routine, we may feel overwhelmed by the perceived complexity of investing. The fear of choosing the wrong investment or losing money can hold us back from taking the first step.
Risk aversion: The fear of losing money can be paralysing. We often prioritise holding on to cash, even if it means losing purchasing power due to inflation. The inherent uncertainty of financial markets makes it easy to delay investing in favour of perceived safety.
Lack of knowledge: Many feel they lack the financial literacy to make informed investment decisions. The vast array of options, jargon, and strategies can intimidate even the most well-intentioned beginner.
The cost of procrastination
This fear can stem from several sources:
Procrastinating on investing has a significant cost: time. The longer you delay, the less time your money has to grow through compounding.
Compounding: This powerful concept means your investment earnings generate further earnings, leading to exponential growth over time. For example, investing R1 000 monthly starting at age 25 can grow to double the sum by retirement than by starting the same investment at age 35, assuming the same rate of return, even though the total contributions might differ only slightly.
The power of time: The key ingredient in compounding is time. Starting early allows your investments to benefit from this compounding effect for a longer period, resulting in significantly higher returns. The sooner you start, the more your money can work for you.
It’s never too late: While starting early is advantageous, it’s crucial to remember that it’s never too late to begin investing. Life rarely follows a perfectly linear path, and many individuals find themselves in a position to make substantial financial contributions later in life. Even if you begin investing later, the power of compounding can still significantly enhance your retirement savings. The key is to start now, regardless of your age, and maximise your contributions within your current circumstances. Every year of investment, no matter when it begins, adds to your financial security. You can still catch up and benefit from compounding up to and into retirement.
Overcoming complexity aversion
While complexity aversion is understandable, it is not insurmountable. Taking the first step is often the hardest part, but there are practical ways to ease into investing:
Start small: Begin with small, manageable steps. You don’t need a large sum to start investing; even modest amounts can grow over time. Online platforms and apps often allow you to begin with minimal investments.
Utilise employer benefits: If your employer offers a retirement plan such as a pension or provident fund, contribute consistently. These plans often provide easy access to diversified investment options, making them an excellent starting point for beginners. The contributions will also be deductible pre-tax making them highly efficient in accumulating wealth.
Seek guidance: Consult with a qualified financial advisor to create a personalised investment plan that aligns with your risk tolerance and financial goals. Advisors can simplify the process, demystify financial jargon, and provide a clear roadmap.
Embrace simplicity: To get started consider diversified investment options such as exchange-traded funds (ETFs) that track market indices or targeted return funds which have a stated return objective. These instruments offer exposure to a wide range of assets and require minimal personal management.
Start learning: Utilise online resources, books, and workshops to improve your financial literacy. The more you learn, the more confident you will feel about making investment decisions.
The long-term perspective
Remember, investing is a long-term journey. By overcoming complexity aversion and starting early, you can significantly improve your financial future. Each step, no matter how small, brings you closer to achieving your financial goals. The key is to start today and stay consistent. Over time, the power of compounding and disciplined investing can transform your financial outlook, helping you secure a more comfortable and prosperous future.
