It’s officially the time of year to catch up on things you’ve been putting off. And for millions of Americans, that means getting to grips with their finances.
If you avoided funding your 401(k) or opening a brokerage account, you are not alone. Nearly half of American adults — 48% — say they have no investable assets, according to a 2024 Janus Henderson Poll.
And for many, the reason for procrastination is simple: the investment is (seemingly) too complicated.
It’s a mindset that, if not overcome, could cripple many young people financially, says Amos Nadler, founder The Wall Street Professor and PhD in Behavioral Finance and Neuroeconomics.
“It’s a bias we call ‘complexity aversion,'” he says. “And that’s the biggest barrier to building wealth for people who aren’t in the market or who have never invested before.”
Here’s how this cognitive bias could be costing you money.
The importance of overcoming complexity aversion
At a very basic level, people who put off important financial tasks have the same fears as those who can’t bring themselves to start an exercise routine—they don’t want to make a mistake or feel stupid.
Just as someone might say they don’t even know how all that fancy gym equipment works, a financially avoidant might say, “Man, this is way over my head,” Nadler says. “‘I’m just not a numbers person.'”
This feeling about money is closely related to another common cognitive bias known as risk aversion. Basically, you’re not only afraid of screwing up, you’re afraid of losing money that you’ve invested time and effort into. And because the fear of losing what you have can override the joy of building wealth, you stay put.
The impulse is, “I’ve worked hard for it and I’m risk averse. I’d rather just have cash,” says Nadler. “I know inflation is eating away at my money, but the market is so volatile I’m afraid.”
But the need to start investing – especially among young people – extends beyond the need for your money to keep up with inflation. By delaying this particular financial project, you are losing what many experts call yours most valuable asset: time.
The longer you are in the market, the more time your money has to grow at the rate of growth. For every year you delay getting started in the market, you will potentially shave thousands of dollars off your future net worth.
Play with online compound interest calculatorand you’ll likely find that sitting on the sidelines for even a few years can have a huge effect on your long-term gains.
Consider a 20-year-old who invests $200 per month in a retirement portfolio that earns an annual total return of 8%. By the time she’s ready to retire at age 67, she’ll have $1.25 million saved. If she starts at age 25, all other conditions being equal, her total drops to about $830,000. And if he puts things off until age 30, he’ll retire with $547,000.
How to overcome an aversion to complexity
So how do you get started? You can always open a brokerage account or self-fund a retirement account, such as an IRA. It only takes a few simple steps.
But if your employer offers a workplace retirement account, such as a 401(k), opting in could be an even easier way to get started. Determine a percentage of your salary to contribute to the account from each paycheck and choose one or more mutual funds for your portfolio.
These plans typically contain low-cost, highly diversified options, such as index funds and target-date funds, which give investors exposure to large portions of the market.
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