Harken back to the good old days. There were no smartphones to distract us, work was confined to the office from 9 to 5, and politics were less heated. Of course, that's looking back with quite the rose-tinted spectacles. In reality, technology has given us more free time, work flexibility has increased significantly over the past decade, and engaging in domestic social and political movements could have been downright deadly in the 1960s.
It’s natural for us to long for what is familiar and shy away from new perceived risks—even when we know there could be something better than the stale status quo. Years ago, a small German community faced a unique chance to reinvent itself. Located atop a lucrative mineral deposit that its government elected to tap, the physical town was slated for demolition. The upside was that the community could redesign a new village from scratch, entirely funded by the German government. Presented with unlimited possibilities, including ditching what irked people and installing new modern amenities, the townspeople chose to replicate their old, flawed, winding hamlet exactly. They decided to play it safe, opting for the familiar.
Every red-blooded American surely embraces the “no guts, no glory” maxim, but we, too, occasionally defer the chance for a better life—at least in a small way—due to fear. Those instincts are on full display in financial markets. While there are some natural gamblers, most people prefer to play it safe with their portfolio. It’s known as conservatism—a cognitive bias that causes us to be overly prudent and resistant to change. To wit, investors commonly hold onto losing stocks for too long and avoid updating their portfolios due to inertia.
Psychologically, we are wired for predictability, even when predictability might harm us. One study found that daughters of alcoholics were more than twice as likely to marry an alcoholic than daughters of nonalcoholics because even painful familiarity feels safer than a different (better) life.1 Research also reveals that people dislike uncertainty so much that they prefer receiving bad news than facing uncertainty—we'd rather get a negative diagnosis than sit for hours alone in the waiting room.2
Such conservatism can wreak havoc on your net worth, particularly regarding market volatility and market timing. Even novice investors understand that stuffing money under the proverbial mattress is a surefire way to never hit financial goals, but too often, individuals remain cash, perhaps from rolling over an old 401(k) or receiving a significant inheritance. Some folks just never get around to reinvesting due to inertia, while others are afraid to risk buying right before a market decline. The warm blanket of cash is comforting in the moment but prevents you from keeping up with inflation.
