Investing Can't Wait
According to Berkeley economics professor and recent Genius Award winner Matthew Rabin, procrastination is a significant impediment to successful long-term investing. Putting off 'til tomorrow what you can do today may result in never getting started.
By Barbara Eisner Bayer (TMF Venus)
November 15, 2000
[This column was first published on July 11, 2000]
To do, or not to do... that is the question. Imagine a 21st-century, harried Hamlet pondering whether 'tis nobler to act now or... well... sleep on it. Perchance to dream....
Have you ever walked into a room for a specific purpose, only to be distracted by something seemingly more important? Then, when you remember you neglected your original intention, you can't remember what your original intention was in the first place! Just another "Senior Moment"? I'm afraid not, my Foolish friend. It's an insidious Procrastinator's Moment.
Most people procrastinate, especially when confronted with unenjoyable tasks. Who would do taxes in early April when the nose catches the aroma of spring's first radiant blooms? What vacationer chooses to begin a diet on the first day of holiday, instead of the first day after? Who among us would rather take out the garbage than watch a tiebreaker in the men's final at Wimbledon? (If you answered "me," please take out my garbage.) Nobody changes bad habits on December 31. Tasks can wait. For the moment, pleasure rules.
Matthew Rabin, the MacArthur Foundation's Genius Award recipient and an economics professor at the University of California-Berkeley, has studied the effects of procrastination, especially on an investor's preparation for retirement. His research shows that people have self-control problems that manifest as a need for immediate gratification. (Can you say "day trader"?) This quest for immediate gratification in the stock market runs contrary to the principles of long-term investors.
To make matters worse, Rabin and his research partner, Ted O'Donoghue, in their paper entitled "Choice and Procrastination," have discovered that procrastination can be induced when there are many options from which to choose. "For example," the researching duo write, "a person might immediately invest her savings in her company's 401(k) plan if there were a single investment option available, but might procrastinate if she must choose from a menu of different investment options because she constantly plans to figure out her best option in the near future."
The choice now is to choose later.
The same holds true for selecting investment strategies like the Foolish Four. When new investors read The Motley Fool's 13 Steps, they discover vats of new information. Many get cold feet, however, when it's time to actually commit money to an investment, and procrastinate. As a result, no investing decision is made.
Putting off for tomorrow what you can do today clearly is the easier path -- although it may make quotemeister Benjamin Franklin turn over in his patriotic grave. Unfortunately, you may pay a stiff price for the lost opportunity since, as the colonial sage put it, "Time is money."
The other main finding of Rabin and O'Donoghue, which goes to the heart of all investors, is that "people may procrastinate more in pursuit of important goals than unimportant ones." When important goals arise out of an individual's ambitious plans, "the more likely she is to procrastinate in executing those plans." Investing is a very important goal.
Think you're immune from procrastination? Think again. The researchers found that if you provide additional options, as in the 401(k) example above, a non-procrastinator can be turned into a procrastinator! No one is safe from the "I'll get to it later" syndrome, especially when the matter is of utmost importance.
How, then, does a Foolish investor avoid falling into the procrastination pit?
The first step is to recognize these all-too-human tendencies in yourself and commit to some vigilance. Once you notice yourself avoiding important issues, it's easier to muster the strength to move past the urge to delay. Make lists of important matters that need attending to. Then attend to them.
If you have money to invest, but aren't sure where to invest it, don't let it sit idly in a savings account earning a meager rate of interest. At least put it in a brokerage money market account, which pays higher interest rates than banks. This way, your money will accumulate more interest while you're accumulating more knowledge. And it will be ready to invest immediately when you decide where to invest it.
Once your money is parked in an interest-bearing brokerage account for the short term, you have the luxury of becoming educated, without time pressure. If you're thinking about investing in the Foolish Four, consider setting up a practice portfolio to learn the ins and outs of owning stocks, without feeling the slings and arrows of underperformance. (Of course, if it outperforms you'll feel a different kind of pain -- but that's your risk for waiting.)
Establish decision-making deadlines, and don't let yourself weasel out of them. After all, if Benjamin Franklin and his decisive pals had been procrastinators, your children might be pledging allegiance to the Procrasti-Nation, the 50 Divided Colonies of England.
