Small Change

Your finances and the law of inertia

An investor at a brokerage house in Fuyang, China. A monthly investment plan which allows a saver to buy shares of an index fund will allow you to ''dollar-average'' the  ost of your investment.
An investor at a brokerage house in Fuyang, China. A monthly investment plan which allows a saver to buy shares of an index fund will allow you to ''dollar-average'' the ost of your investment. PHOTO: REUTERS

Through sheer inertia, some colleagues have accumulated a sizeable pot of cash after participating in the in-house savings plan for a long time

Since my university days, when I studied natural sciences, I have never ceased to be amazed that the laws of physics can often be applied to human behaviour as well.

Take the observation made by the great 17th-century scientist Isaac Newton that for every action, there is an equal and opposite reaction.

Translated into everyday life, it means that if you treat somebody awfully, he will react in a violent manner that will hurt you just as badly. But if you treat someone with kindness, that act of kindness will be reciprocated - a backhanded way to show that even the laws of nature encourage a person to do good.

But there is another observation made by Newton worth highlighting. He noticed that a stationary object continues to stay absolutely still unless it is disturbed by some external forces.

In everyday life, we know it as a tendency to keep things as they are, unless we are forced by circumstances to make changes. There is even a term for it in the realm of investing - financial inertia.

Believe it or not, financial inertia is also one tendency which companies can exploit in order to get regular business out of you. For example, some of them may offer you a free subscription to their websites for a limited period of time and charge you in full after that, unless you make an effort to cancel.

Where investing is concerned, it is a financial trait that can turn out to be very costly for those of us who adopt "buy and hold" strategy if we are not careful.

Just how expensive this can be was driven home forcefully to me as I examined my stock portfolio recently. Since July, I had become rather bearish on the stock market as I watched with alarm the sell-off of blue chips which sent the benchmark Straits Times Index (STI) plunging by as much as 17 per cent.

But I dithered and did nothing about my worries. Now, I find myself sitting on a paper loss on some of my stock investments. In hindsight, I should have done something about my growing unease but I was reluctant to take any decisive action. So much for crying over spilt milk.

I am sure that there are other people with similar experiences who take a "wait-and-see" attitude and who then find that it is too late to make changes.

For example, many of us have a habit of making New Year's resolutions to try to change our life for the better and set goals for the coming year, only to forget about them almost immediately after making them.

This is because we always find it much easier to do nothing and stick to the status quo.

If we are not careful, this may cause our lives to drift. Before we know it, we may find ourselves stuck in a rut and think that if we could start all over again, we would do things differently.

Believe it or not, financial inertia is also one tendency which companies can exploit in order to get regular business out of you.

For example, some of them may offer you a free subscription to their websites for a limited period and charge you in full after that, unless you make an effort to cancel.

The problem with such a marketing ploy is that many of us end up paying for services which we may not want or need because the onus is on us to terminate the subscription.

Then there is this gimmick employed by insurance companies which offers you the option to cancel a policy within the first few weeks after you sign up with them, knowing full well that sheer inertia will ensure you will not do anything to reverse your decision.

But that is not to say that financial inertia is all bad. In fact, it can sometimes work to our advantage if we know how to make use of it.

Some years ago, I found that I could enrol in a savings plan with the Straits Times Cooperative - a non-profit 81-year-old organisation which operates within my company - whose objective is to encourage its members to save and improve their finances.

Membership of the ST Cooperative has its privileges - its savings plan enjoys a higher payout than the paltry interest doled out by banks. Members can opt to park up to 25 per cent of their monthly salary with the savings plan, subject to a cap of $300 a month.

After becoming a member, the money I have earmarked for its savings plan is automatically deducted from my pay cheque every month and I spend no further time dwelling on it.

Many of us are quite happy to leave our savings there and not touch the money unless we are in dire need of cash. Even then, there is the option to take out a loan using our savings as collateral so that we don't lose any accrued benefits we may enjoy as members.

Through sheer inertia, some of us find ourselves accumulating a sizeable pot of cash after participating in the savings plan for a long time.

One long-time colleague even got to withdraw more than $200,000 when she left the company. It is SPH's best-kept secret for staff, she told me when she got her cheque.

Membership of the ST Cooperative is available only to employees of Singapore Press Holdings and Times Publishing. But there are commercial variations offered by the banks which may be worth considering for those who want to enrol in a regular savings plan for the long haul.

One scheme which I occasionally flag in this column is the monthly investment plan which allows a saver to buy shares of an index fund tracking the STI for as little as $100 a month. There are four financial institutions which currently offer such a plan - POSB, OCBC, Phillip Securities and Maybank Kim Eng.

Such an investment approach will allow you to "dollar-average" the cost of your investment. When the market goes up, you get fewer shares. But when the market is down, you get a little more.

Now, considering my anguish over the recent drop in the value of my stock portfolio, you may wonder why I still encourage a saver to subscribe to a monthly stock investment plan.

After all, the STI is trading at its lowest levels in three years. That means a person who started investing in an STI tracker fund three years ago under the monthly investment plan would be experiencing a paper loss on his investment.

However, I am confident that he will be able to reap a handsome profit if he is patient enough to sit out the current market turmoil. It also beats keeping the money in the bank as the index fund has a dividend yield of about 3.27 per cent at current prices.

When I started my working life in the aftermath of the Pan-Electric crisis in 1986, the STI was trading at only about 900 points. Almost three decades later, it has more than tripled to about 3,000 - and this is despite the four recessions that hit Singapore in the intervening period.

Call it financial inertia if you like. It can help to propel you to a comfortable retirement if you start early enough. How else can you triple your money?

A version of this article appeared in the print edition of The Sunday Times on October 11, 2015, with the headline 'Your finances and the law of inertia'. Print Edition | Subscribe