The saying “change is good” fails to take human nature into account. We are actually creatures of habit and find inertia more comfortable than change. Whether inertia turns out to be good or bad for our financial independence depends on how we use it. Here’s how to make inertia work for you.
1. Keep investment fees low
Inertia can help harness the magic of compounding. For instance, take a $250,000 balanced portfolio of stocks and bonds with very low costs (0.1 percent or less in annual fees). Let inertia take over and, earning an average return of 5 percent annually, that $250,000 could grow to $847,000 over 25 years. But the same portfolio with even a single percentage point in additional annual fees would lose about $180,000 over the same time period.
2. Invest in low-cost target-date retirement funds
The only thing better than a buy-and-hold approach is a portfolio with a smart rebalancing strategy. That means buying more stocks after a plunge and selling after a surge. It’s simple but not very easy to carry out. But many investors respond to stock surges by buying and to stock plunges by selling — the typical greed and fear dynamic. A target-date retirement fund picks an asset allocation based on the age you are set to retire and gradually gets more conservative as you get older. Such funds must stick to a specific asset allocation and rebalance strategy, and they typically sell some stocks after a surge and buy more after a plunge. In fact, I consider these the first (and overall still the best) robo-advisers around. Once they're set up, you don't need to do anything.
3. Automate your savings
Assigning a portion of your paycheck to go directly to a savings account has been shown to be the optimum way to save. If you never have access to the money, then you won’t miss it. This year many of us will see higher paychecks as a result of tax reform, which is lowering tax rates and income brackets. You might consider socking that increase away, as well as upping your annual savings amount by, say, half of any after-tax raise you receive. Be sure to also max out your employer’s 401(k) retirement plan, another automatic savings vehicle that typically includes an employer match of some kind. And use technology to help you save; there are many savings apps to help you automate the task. Then let inertia take over, and you’ll see your net worth grow.
4. Get used to lower spending
It’s very difficult for people who are used to living an extravagant life to consider reining in their spending. But once you adapt to the change, inertia kicks in and it becomes the new normal. Try cutting expenses and commit to sticking with that habit for six months. Developing a budget may help. Maybe even tell a friend that you want to save $3,000 over six months, and ask him or her to follow up to see if you reached your goal. You may find it very easy to continue spending at a lower level. The sooner you start, the more you will have in retirement.
Inertia can be your best friend or worst foe. These tips will help you keep it friendly. Because when inertia is your friend, your life in retirement will be a better, happier place.
Allan Roth is the founder of Wealth Logic, an hourly based financial planning firm in Colorado Springs, Colo. He has taught investing and finance at universities and written for Money magazine, the Wall Street Journal and other publications. His contributions aren't meant to convey specific investment advice.