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It’s officially the time of year when you get to work on that thing you’ve been putting off. And for millions of Americans, that means facing their finances.
If you have been avoiding fund your 401(k) or open a brokerage account, you are not alone. Nearly half of American adults (48%) report they have no assets to invest, according to one study. Janus Henderson Survey 2024.
And for many, the reasoning behind procrastination is simple: investing is (apparently) too complex.
It’s a thinking pattern that, if not overcome, could cripple many young people financially, says Amos Nadler, founder of Wall Street Professor and a Ph.D. in behavioral finance and neuroeconomics.
“It’s a bias we call ‘complexity aversion,'” he says. “And it’s the biggest barrier to building wealth for people who aren’t in the markets or who have never invested before.”
Here’s how this cognitive bias could cost you money.
The importance of overcoming the aversion to complexity
At a very basic level, people who put off completing essential financial tasks have the same fears as those who can’t start an exercise routine: They don’t want to make a mistake or feel stupid.
Just as someone might say they know nothing about how all that fancy gym equipment works, a person who avoids finances might say, “‘Man, this is going over my head,'” Nadler says. “‘I’m just not a numbers person.'”
Feeling this way about money is closely related to another common cognitive bias known as risk aversion. Essentially, not only are you afraid of making a mistake, but you are also afraid of losing the money you spent time and effort accumulating. And because the fear of losing what you have can overcome the joy of accumulating wealth, you stay there.
The drive is: “I’ve worked hard for it and I’m risk averse. I’d rather just have the cash,” Nadler says. “I know inflation is eating up my cash, but the market is so volatile that I’m afraid.”
But the need to start investing (especially among young people) goes beyond the need for money to keep up with inflation. By procrastinating on this particular financial project, you are losing what many experts call your most valuable asset: time.
The longer you are in the market, the more time your money will have to grow at a compound rate. For every year you delay getting started in the market, you’ll potentially save thousands of dollars in your future net worth.
Play with a online compound interest calculatorand you’ll probably find that staying on the sidelines for even a few years can have a huge effect on your long-term profits.
Consider a 20-year-old who invests $200 a month in a retirement portfolio that earns an annualized total return of 8%. By the time she is ready to retire at age 67, she will have saved $1.25 million. If you start at age 25, all other things being equal, your total drops to about $830,000. And if you postpone everything until age 30, you would retire with $547,000.
How to overcome complexity aversion
So how to start? You can always open a brokerage account or self-fund a retirement account, like an IRA. Doing so requires just a few simple steps.
But if your employer offers a workplace retirement account, like a 401(k), opting for it may be an even easier way to get started. Designate a percentage of your salary to contribute to the account with each paycheck and select one or more mutual funds for your portfolio.
These plans typically contain low-cost, highly diversified options, such as index and target-date funds, that give investors exposure to large swaths of the market.
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