Five reasons why money remains idle in your bank account

By Uma Shashikant

The large unutilised balance in the savings bank account leads to pangs of regret. So we decide to browse investment options. There is too much information out there. We seek advice, but remain unconvinced. Someone recommends an adviser or relationship manager. We talk, but are unimpressed. The money idles. Why is this so tough? What exactly are the constraints?

First, we don’t make money decisions easily. There is a lot at stake and we like to decide after considerable thought. There is no sense of urgency. The speed of execution we deploy when it comes to the dentist is not applicable to investing decisions. We are fine with the money lying idle and console ourselves that at least it is not losing value in a wrong investment. Doing nothing is easier. Research shows that when there are too many choices, we worry about making the wrong choice and regretting it, so we do nothing.

Second, we are unable to simplify the investment selection process. We feel we should evaluate everything, have some basis for selection that is robust, and choose the best among the lot. The problem with investment products is that they work in the dynamic context of the marketplace, and there is no telling how they will do in future. We choose based on what our needs are and form expectations about how it would work for us. Product selection is not an exact science.

Third, we are quite mixed up about timiing. Some of us think that timing is everything and whether we make money or not depends on when we invested and when we took the money out. There is little research to support the notion that timing matters a lot, nor do we have tools to build a foolproof timing system. We are unable to accept that if our investment decisions are made over a period of time, typically the 20-30 years of our working lives, the timing of our investments will even out.

Fourth, we are ill prepared to deal with unexpected events. The markets may crash; there may be political events that alters our economy significantly; the government may make decisions that modify our systems; there may be global events that affect our investments. Not just the downturns, the very volatility in financial markets can be unnerving, as we have no control over how things unfold. We worry if we should act, or stay quiet. Would the risk pass, we wonder, but we are not sure until well after the event about what the right approach should have been. It is tough dealing with panic.

Fifth, despite the best research and analysis, some of our investments could underperform. Continuing to hold them will bleed the other components of the portfolio that are doing well. Making the decision to sell what is not working tends to be difficult for many. We are so attached to what we bought that we hope it would turn around; or we refuse to deal with the regret of a wrong choice; or we simply cannot take a loss. Portfolio review is not an easy task for many of us.

Also Read: Who needs money advice most: Rich, poor, young?

Let’s pause to consider how we could deal with these constraints. If we are prone to postponing our investment decisions, we can either ask someone else to do it for us or automate it. If we cannot make a satisfactory choice of products we can seek professional help to build our portfolio, or simply buy indices and ETFs.

If we worry about timing, we can ask someone to hand-hold us, or automate the process to invest systematically. If we cannot deal with unexpected risks, we can seek advice about how to react to the event or wait to let them pass. If we are not able to review our portfolio, we can invest in the services of a professional, or a system.

That in gist is the choice between engaging a financial adviser and DIY. For advisers to add value, they should be able to persuade you to organise your finances so that you identify your goals and invest for them; you invest in well-researched products according to a strategic asset allocation; you invest systematically and for the long run; you do not panic; and you review and revise your investments periodically. If you find that you are able to perform these tasks by yourself, you should make that choice.

The problems in the financial advisory space come from the presence of sellers of financial products, whose incentives and earnings come from product pushing. Mirroring the society we live in, financial advisory is also a mixed bag of advisers who are competent and those who are not.

With the template that we just discussed, you should be able to engage in a discussion with your adviser about what they should do for you, and how. Spend time on that conversation. Ask for more information. Understand the process and hold the adviser accountable. Agree upon a timetable for investing, review and revision and ensure that the adviser follows through. You will not find a good adviser who will work with your interests in mind, unless you are willing to invest time and energy.

For many, time is a constraint. Invest it wisely on core tasks and processes and allow your adviser to do the rest. Spend most of your time and energy in earning the money and allocate a small portion of it to working with your adviser and hold him accountable.

Some of us are very enamored by the markets, and find the process of investing very stimulating. Some have a great skill in execution, and find it easy to follow through and complete planned investment decisions. Some are in charge of money and find the costs of outsourcing painful. DIY is suitable in such cases. Choose whatever keeps your money well deployed and closely monitored, whether by your adviser or you. Don’t let it lie idle because you haven’t been able to decide either way.

(The author is Chairperson, Centre for Investment Education and Learning)