Four ways we hold ourselves back from investing

If you read, listen or watch anything about finance, the mantra that ‘markets historically outperform cash’ has likely been engrained into your mind. While you might agree with this statement logically, you also could still be sitting on a pile of cash savings and have little to no investments in the market.

In case you haven’t heard the spiel, while the stock market can go up and down, cash has its own set of risks as interest rates fight against inflation. If your cash earns interest at a slower pace than inflation grows, you can end up with far less purchasing power down the road, despite your careful savings. While it’s no guarantee for the future, historically, stock markets have gone up when you look across a long period of time.

So why, when investing has been a better bang for our buck, are we still apprehensive to put our money where our mouth is?

According to research sponsored by AJ Bell, a lot of it comes down to the human condition. In a study of how behaviour affects our finances, economists Dr Richard Whittle and Dr Stuart Mills identified a few of the phenomena that can stop us from following the numbers in the investment journey.

What behavioural barriers do we meet while investing?

1. Sticking with the status quo: Once money is sitting in cash, such as a Cash ISA account, doing nothing is often the easiest thing.

Around 70% of individuals with more than £5,000 in cash savings have never even considered investing in a Stocks and Shares ISA. Even though these savers may have plenty of money in cash as a safety net and be in a position where they are ready to invest, the ease of sticking with the status quo might stop the process.

2. Fear of losing: Generally, people get more upset when they lose money than happy when they receive it.

For some, the fear of losing money outweighs the possibility to gain, and stops people from investing, even when they don’t need access to that money in the short term.

3. Having access now: Savers tend to favour immediate needs over long-term growth, meaning that want to keep their money accessible.

Cash savings are seen as liquid and readily accessible, providing comfort that money can be accessed at any time.

In contrast, stocks and shares are often perceived as illiquid. It is true that the value of the money in your investment ISA will constantly change, and if there’s a dip in the market, it may not be a good time to withdraw. But you can generally sell your investments any time you’d like, particularly if they are shares in larger companies.

Even if the market has dipped recently, you may still have increased the value of your savings compared to when you first made the investment.

4. Mental accounting and categorisation: People mentally separate their savings, which can be a positive when it comes to keeping track of your money. However, it also means that once money is saved in cash, it tends to stay put.

First choices are often sticky, and switching to an investment, such as through a Stocks and Shares ISA, is an additional step.

How do ISA rules play into our investment mentality?

Currently, ISAs are split between a cash-only version and other variations where you can hold cash and investments.

Even though you can hold both a Cash ISA and a Stocks and Shares ISA, the separation of the accounts may make investors feel that they should choose between the two. However, even experienced investors typically hold some money in cash, giving them need for both vehicles.

There is some discussion about changing the way that the government handles ISAs in the future. It is not clear yet what those changes will be. However, AJ Bell CEO Michael Summersgill has advocated for simplifying the ISA system to break down some of the barriers keeping people from investing.

“ISAs are incredibly popular but political tinkering means a patchwork quilt of products has been stitched together over time. Starting with a blank sheet of paper nobody would design the system we have now, which labels people either savers or investors, when in reality most need a bit of both,” Summersgill says.

“This report evidences the case for simplification, illustrating the impact divisive choice and friction in the ISA market has on consumer behaviour. Removing complexity could play a crucial role in smashing the psychological and material barriers between saving and investing, unleashing the retail investing revolution government has in its sights.”