Getting the money out of your mattress

We’ve all made dumb mistakes with our savings over the years. But one of the biggest mistakes investors make is doing nothing at all.

Over the last couple of years I’ve met an awful lot of folks who are sitting on large sums of cash. Some of these people used to be fully invested, but they got spooked and liquidated their portfolios—some have even been on the sidelines since the 2008-09 crisis. Others have sold a house or a business and are suddenly flush for the first time. In both cases, they tell me the idea of moving that cash into the markets is as appealing as jumping naked into the frigid ocean. And so they do nothing.

This may not seem like a grave mistake: after all, a savings account never goes down in value. But that’s ignoring opportunity cost: the returns you give up when you fail to implement your investment plan. A simple balanced portfolio such as the Global Couch Potato (40% bonds and 60% Canadian, U.S. and international stocks) returned about 14% annually over the three years ending this May. Holding $100,000 in cash during that period meant foregoing returns of close to $50,000.

Here’s some advice for overcoming your analysis paralysis and getting invested.

Accept that it never feels like a good time. If you’re holding cash you may have convinced yourself you’re not really procrastinating: you’re just waiting for markets to pull back so you can buy when prices are lower. Well, maybe.

But try to remember your mindset in 2011, the last time we experienced a correction. Europe seemed ready to collapse under its debt, the U.S. had its credit rating downgraded, and Canadian stocks fell about 20% between March and September. How many people decided that was an ideal time to load up on equities? Does anyone honestly believe they would feel less anxious investing a large lump sum during a period of global turmoil?

Bottom line: it never feels like a good time to put a large amount of money into the markets. People feel anxious when markets rise (“the good times can’t last forever”) and when they fall (“things can always get worse”). If you’re waiting for your uneasiness to go away before you pull the trigger, you’ll wait in vain.

Start with a plan. You can’t invest with confidence until you give your decisions some context. A portfolio is not an end in itself: it’s simply a tool to help you achieve a financial objective. Once you are able to connect your money with your real-life goals, it becomes much easier to get that cash out from under the mattress.

Say you recently downsized your home and now you have a few hundred thousand dollars to invest. You’re nervous about the possibility of rising interest rates, the struggling Canadian economy, a looming bear market in U.S. stocks and the latest news from Greece. With monsters under every bed, you don’t know how to begin building a portfolio, so you keep your cash in a savings account.

Now suppose you work with a financial planner who isn’t an armchair economist. She’ll ask you: How many years will you rely on the portfolio for retirement income? How much will you need to withdraw each year? What target rate of return do you need to meet those objectives? How much of an annual loss can you tolerate? With these questions answered, the planner can help you choose an appropriate mix of stocks and bonds based on your needs and goals, not the week’s headlines.

Don’t sweat the small stuff. Many people spend way too much time agonizing over small decisions. They can’t figure out whether to choose this ETF or that one, even though both funds are almost identical. Or they worry about optimal tax-efficiency—even when they are in a modest tax bracket. This is like planning to improve your all-cheeseburger diet as soon as you have exhaustively compared the relative merits of red apples versus green ones.

The recipe for successful investing includes a commitment to saving, broad diversification, keeping costs low, and executing your plan with discipline. If you get those ingredients right, you have a lot of wiggle room with the smaller decisions. That’s not to say you shouldn’t do any research: it just means you can’t go too far wrong if you simply use plain-vanilla ETFs that track the broad market with low fees.

Do it gradually. If you just can’t bring yourself to invest all at once, that’s fine: moving into the markets gradually is a whole lot better than hoarding cash. If you do this, however, draw up a schedule based on the calendar, not on market conditions. You might decide, for example, to invest one-quarter of your lump sum now and another quarter every six months. Don’t fool yourself into thinking this is easy: you will probably feel anxious on each of your scheduled dates. But if you can’t bear to jump in the ocean, dipping a toe is good way to start.