Why So Many Investors Are Paralyzed Right Now, and How to Break the Freeze

Quick reading

• Human brains evolved to seek certainty to survive, leading to anxiety and decision paralysis in the face of market uncertainty.

• Waiting for perfect conditions costs investors real returns through inflation and loss of capitalization.

• Build anchors of certainty (3-6 month emergency savings, automated 401(k) contributions, rules-based plans) to reduce anxiety.

• Are you ahead or behind in your retirement? SmartAsset’s free tool can connect you with a financial advisor in minutes to help you answer that question today. Each advisor has been carefully vetted and must act in your best interests. Don’t waste another minute; Learn more here.

Although the stock market continues to reach new highs, investors are filled with anxiety. Uncertainty about world events and the global economy leaves many people frozen, says author and journalist Simone Stolzoff.

Why do our brains lock up when markets become erratic? For early humans, “if there was a rustling in the bushes and they didn’t know the source of that noise, it could have been potentially lethal,” Stolzoff said on a recent episode of HerMoney with Jean Chatzky. “Uncertainty was a matter of life and death. So our brains are programmed to feel safe when we have certainty and feel incredibly uncomfortable and anxious when we don’t.”

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Chatzky ended the investment. “If you’re expecting certainty, if you’re expecting perfect answers, it’s almost impossible to accept the fact that some things in this world just don’t have them,” he said.

Freezing investors slowly lose capital due to inflation and give up compounding while waiting for a signal that will never come. Holding cash feels safe, but it silently bleeds purchasing power. Prices keep going up whether you make a decision or not.

“If you don’t put your money to work, then you face the risk of inflation,” Chatzky said. “You face the risk of taxes that will reduce the purchasing power of your dollar. So you’re still going to lose money just by doing nothing.”

Consider $50,000 in a savings account at the current policy rate. The nominal interest earned over one year is approximately $1,875 before taxes. With the CPI at current levels, most of it is consumed by inflation. The same $50,000 in a diversified index fund earning a long-term historical average of about 8% would generate something closer to $4,000, leaving a positive real return after inflation. Paralysis has a price and worsens with each year of indecision.

The framework that breaks the freeze

Stolzoff’s solution is structural. Build “anchors of certainty”: 3 to 6 months of liquid savings, automated 401(k) contributions, and a rules-based investment plan that doesn’t renegotiate every time the news cycle ramps up. “When we are certain about some facets of our lives, it is easier to remain uncertain in others,” he said.

Combine that with Jeff Bezos’ one-way door vs. two-way door test. Marriage and buying a home are one-way doors. Starting a 401(k) contribution with 6% of salary is a two-way door. You can increase or decrease it next month. Stolzoff also supports Bezos’ 70% rule. “You should make decisions when you’re 75% ready, because if you wait until you’re 100% ready, it’s often too late,” he said. Stolzoff recommends finding “that little thread in the big tapestry that you can pull on” rather than throwing up your hands in resignation.

Whether this advice helps or hurts depends on one question: Is the decision reversible? An automated monthly contribution of $500 to a target-date fund is a two-way door. If you hate it in three months, you can change the assignment or pause it. Charging a 401(k) plan to time the market is a one-way door. The taxes and the 10% early withdrawal penalty are permanent.

Tips for managing financial uncertainty

1. Build the anchor first. Park 3 to 6 months of expenses in a high-yield savings account close to the policy rate of 3.75%. Certainty in the emergency fund makes uncertainty elsewhere bearable.

2. Automate two-way door. Set a 401(k) contribution today, even at 3% of salary, and increase it 1% per year. As Stolzoff said: “Action can absorb anxiety. It is actually through action that we begin to see more clearly and our anxiety begins to reduce.”

3. Apply the 10-10-10 test. Consider Suzy Welch’s test: What’s the impact in 10 days, 10 months, 10 years? Most investment decisions seem small in 10 days and huge in 10 years.

4. Stop investigating once new information stops coming. If the article below tells you what the last three did, you’re looking for validation rather than new information.

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