The Law of Inertia

I am an avid fan of science, especially physics.   Why?  Because every aspect of our very existence flow from the fundamental laws of physics.  From biological to radiation and thermodynamics, there is a law summarizing the general properties and the relationship between inputs and results.

What’s more, there are parallel applications of the laws of physics to our daily life.  One in particular is Newton’s law of inertia, which is broken down into two components.

  • An object at rest will remain at rest unless acted upon by an unbalanced force.
  • An object in motion continues in motion at the same speed and direction unless acted upon by an unbalanced force.

It’s uncanny how this law applies to our daily world.  I have personally fought with Newton’s first law during my remodeling endeavors of our 1904 home.  Almost weekly I looked at the fence in need of a few additional anchors, and thought to myself “Tomorrow.  I get out there and secure that section tomorrow”.  Only to watch a few months slip by.  Then one morning as I returned from a meeting I noticed a gaping hole in the fence line.  It seems, while I was going about my daily routine a windstorm of unusual magnitude blew it down.  I put everything aside and spent the afternoon repairing the fence.

Much is the same with investing.

In general, individual investors tend to avoid action until there is a substantial event, and only then do they make the wrong moves.   The best known example is the tendency to rush into stocks after a substantial market run when the emotion of the rally is nearing feverish pitch, only to watch in frustration as the markets transition into the next correction.  As the law of inertia takes hold in the form of paralysis, investors ride the markets down as long as emotionally possible, ultimately selling into the capitulation point and running to safety where they sit and wait for the next inspiration to act.

Estate planning inertia

Why do today what I can put off until tomorrow?  Unfortunately, with estate planning the risk of inertia can have grave consequences (no pun intended).  If you live in a community property state or have assets of any monetary value, an estate plan will ensure your assets move to your beneficiaries according to your desires.  While it is true to say you will not be thinking about the issue from the brown side of the ground, those on the green side will be left to contend with affairs.  Absent a transfer on death agreement, a will, or a trust, your assets will land in the probate courts where someone unfamiliar with your intentions will make educated guesses about the direction of your estate.

Breaking the cycle

Ultimately, and unfortunately too often, the repetitive behavior of buying high and selling low results in complete disenfranchisement with the investment process.  There is hope and an alternative.  A colleague of mine used to say “plan the trade and trade the plan”.  She was something I am not, a day trader.  But those words ring true for everyone.  Have a plan in place and stick to it.

If you happen to jump into the market at a high point, make sure your investments are the very best quality, you’re properly diversified within and across asset classes (stocks and bonds according to your tolerance for volatility and time frame for needs) , that you have secured short term emergency funds (3 months for two income household, 6 months for one, and 12 months for no income) and you maintain a disciplined strategy as over time markets do recover from crisis.  It just takes a while for the bad news to shake out and optimism to return.

In short, F= m*a.  Only F = fear or greed (the emotions of investing).  M = market volatility (up or down) A = your asset value

Change the force. Have a plan.