Thursday, 09 January 2025 04:26

This is the ‘biggest barrier to building wealth,’ says behavioral finance expert

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I’ve been meaning to sell some company stock and diversify into another investment for awhile now. Here’s the thing, though: it’s hard. Not the actual sale – that’s as easy as clicking a few buttons. But first I need to look up a bunch of stuff related to taxes. 

There are other details, too, that I’m going to have to call someone and ask about. Because that sounds miserable, I haven’t done it. 

Behavioral finance experts have a name for this cognitive bias: complexity aversion.

In my particular case, it’s not a huge deal. But if it’s keeping you from, say, investing in the stock market at all, it’s something you’d be wise to address, says Amos Nadler, founder of Prof of Wall Street and a Ph.D. in behavioral finance and neuroeconomics.

“It’s the biggest barrier to building wealth for people who are not in markets or who have never invested before,” he says.

Staying on the sidelines means sacrificing your greatest asset as an investor: time. The longer you invest, the more time you give your money to grow at a compounding rate. For every year you delay getting started in the market, you potentially shave thousands of dollars off your future net worth.

Consider a 20-year-old who invests $200 a month into a retirement portfolio that earns an annualized total return of 8%. By the time she’s ready to retire at age 67, she’ll have $1.25 million saved. If she starts at age 25, with all other conditions the same, her total drops to about $830,000. And if she puts things off until age 30, she’d retire with $547,000.

Spend a few minutes playing around with Make It’scompounding interest calculator and you can see for yourself.

So if enrolling in that 401(k), for example, has seemed too complicated, now’s the time to talk to someone in HR about getting started. Your future self will thank you.

 

CNBC

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