Last Updated on November 10, 2021 at 8:15 am
Avijit asks, ” I am in my early forties now (completed 42 this July) and have some ad-hoc investments in MF and stocks so far. I took your goal-based planning course last year. However, since then, I have been only reading one article after the other without making up my mind. I call this analysis paralysis. And I am feeling helpless now”.
“I am not sure when I am going to be able to plan and make planned investments. This is making me anxious. How can I (or someone with my age(early forties) and profile (working for an IT MNC)) come out of this analysis-paralysis and put the ideas/knowledge to work? And more importantly, is such a person late in life for making investments and meeting the goals? Much appreciate your response”.
Analysis paralysis is a common problem in personal finance. And it affects different people differently. For example, I can choose a mutual fund within 10 mins and immediately invest quite a big amount in it. Still, if you ask me to choose a health insurance policy, I would hesitate considerably and flat out refuse to make specific product recommendations. This is the reason I sought help: Why we purchased a 2nd set of base and super top-up health insurance policies.
Of course, who to take help from also involves a decision, and many people hesitate to get help because they don’t know who to trust and who they would be comfortable with. I was just lucky to meet a competent person.
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The point is, analysis paralysis is extremely common and, to a small extent, healthy as it shows that you care about money and its future role.
It is okay to take a week or even a month to make a decision – as long as a decision is taken at the end of that time! If not, there is a problem. The solution is easier said than done, but it is possible to overcome it if we look at the decision-making process differently.
In personal finance, there are two kinds of mistakes – the ones you can correct quickly and the ones you cannot correct quickly, perhaps never. Why do we fear making a decision? Because we fear making a mistake.
One of the biggest lessons we learn from experience in investing is, no one knows at the time of investment our stock pick or fund pick will come good. We can analyze for hours, but it comes down to a leap of faith at the end of the day. This is true for insurance too.
Investment is not a one-time action but a journey where we continuously learn and course correct. So start without hesitation with some basic knowledge.
Thankfully, if things turn sour, a stock or mutual fund investment is easy to correct. If one chooses a simple index fund, then that headache is also gone. See, for example: How Avadhoot Joshi evaluates his investment portfolio.
This even applies to choosing an investment advisor. Unless we begin the relationship, we can never know if our choice is right or wrong. We can always chuck them if it is wrong, start working with another or DIY in frustration! If you wish to narrow down the selection process from 1000s of advisors to a trusted handful then you can consult our list of Fee-only Financial Planners in India (SEBI RIAs) More than 1000 of our readers work with them.
Thankfully, DIY investing can be easy if we have not made too many mistakes (maybe analysis paralysis has benefits, too!). Here are some thumb rules to follow without analysis paralysis (assuming you trust our research and experience)
- If your need is five years away, choose 100% fixed income. Use FD or RD if you are worried about debt funds. Or you can choose a liquid fund or money market fund. These are the easiest debt funds to choose from (aside from overnight funds)
- If your need is 5-10 years, choose 20-30% equity (index fund) only if you are willing to reduce this exposure in the future systematically. Else stick to fixed income.
- For needs above ten years, start with an initial asset allocation of 60% equity (index fund) and the rest in fixed income. Start! That is the most important step. Never stop investing and never stop learning about how to manage risk in the portfolio.
The real point we are trying to make is: As long you avoid ULIPs, other insurance products, or any other product just for the tax saving, you can quickly start and learn on the fly. If you choose index funds, half the burden of worrying about fund performance is already taken off the table.
That is, analysis paralysis can be largely reduced in the entire money management space by choosing passive funds where suitable and by appreciating that the right choice can never be known beforehand, and the best part is, one need not know it beforehand.
Starting the investments – that is the most important part. Then all one has to do is keep the investing going and gradually learn about goal-based risk management.
In summary, we would like to recommend the following to Avijit:
- Stop analyzing! I am sure you have done enough and know enough.
- Stop being anxious! You have already started investing. List all your stock and fund investments and tag them to your long term goals. Do not add any more funds or stocks to this.
- Focus on getting your asset allocation right following the thumb rules listed above.
- Maintain an investment journal: Ensure you regularly invest and document your investments. Focus on increasing your investments by 10% each year.
- Then and only then, think about how to reduce risk in your portfolio in future. Since you have already taken our course, you already have a road map in place. Just stick to it. We are confident that you will be able to achieve your goals in good time.
- Regarding your question about “being late”,: regret can paralyze us from acting worse than too much analysis. So the time that has gone by has gone by, and there is no point thinking about it. Act in the present and look to the future with a plan and then hope.
Crazy as it may seem, the only way to get rid of the fear of making mistakes is to make some mistakes, learn from them and not make the same mistakes again.
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