- When it comes to investing, there are many routines that can add value, but the most impactful one is also the most obvious: automatically saving and investing.
- By setting aside a large portion of your income and putting those funds to work in a defined strategy, you’re bypassing two difficult decisions that commonly paralyze investors: What should I buy? Should I wait for a dip?
- This not only lets you harness the full potential of compounding but it also prevents you from finding yourself sitting on the sidelines of a rallying market.
- Listen to the UBS On-Air: “Investment Strategy Podcast”—Habit-forming and what does market volatility really mean in retirement?
The adjective ”habit-forming” is normally used to describe something addictive or out of our control, but not all habits are bad. And in any case, we’re always forming habits, no matter what we do.
Habits aren’t just another unfortunate defect in human behavior; they are a vital tool, and when harnessed properly, they can be incredibly beneficial. After all, making decisions is hard, and the more decisions we have to make, the less consistently we’ll make them well.
So as a general rule, we should automate good decisions and raise the barriers to making bad decisions.
For example, setting an alarm is automating a good decision, and hitting the snooze button is forcing you to intervene to make a bad decision. But even though hitting the snooze button can make you feel a little guilty, that might not be enough to stop you from sleeping in. Imagine if you had to pay a fine each time you hit the snooze button: How much would it take for you to change your habits?
Probably a lot less than you think.
It only takes a nudge
When I lived in D.C., the city implemented a 5-cent tax on plastic bags. In the weeks after the tax, it was common to see shoppers cradling milk jugs and vegetables in their arms while walking down the street, rather than pay for a few plastic bags. Over time, despite the tax’s relatively minute economic impact, it nudged the city to drastically increase its use of canvas bags.
Just a few weeks ago, a study found that Philadelphia’s 1.5-cents-per-ounce soda tax was able to reduce the sale of artificially sweetened beverages by 1.3 billion ounces—a 51% decline—inside the city limits! The study also found that sales rose about 308 million ounces outside the city limits, suggesting that while most consumers shifted to buying other drinks, some decided to drive outside of the city to save a few cents (most likely offsetting their “savings” through gasoline costs and wasted time).
Keep an eye on your habits
When it comes to investing, there are many routines that can add value, but the most impactful one is also the most obvious: automatically saving and investing. By setting aside a large portion of your income and putting those funds to work in a defined strategy, you’re bypassing two difficult decisions that commonly paralyze investors: What should I buy? Should I wait for a dip?
This not only lets you harness the full potential of compounding—the most powerful force in the universe—but it also prevents you from finding yourself sitting on the sidelines of a rallying market. As we noted in our recent “lump sum” report, history shows that putting funds to work right away is almost always the right decision, especially for balanced portfolios. This usually feels uncomfortable, however, so forcing yourself to make this decision over and over and over again with each paycheck would result in a meaningful drag on your lifetime investment earnings.
It also gives you a defined budget for your expenses, and creates a default “no” answer for overspending. If you want to spend more than your budget, it forces you to raise funds; adding this simple extra step makes it a lot easier for you to stick with your plan. That goes double if you have to talk to your advisor to explain this decision.
To harness the power of habits, we need to be conscious about which habits we are cultivating. As Vince Lombardi once said, “Practice does not make perfect. Practice makes permanent. Only perfect practice makes perfect.”
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