Overview – Sometimes, “Do-Nothing” Is a Valid Option
“Don’t just stand there, do something!”
When faced with any sort of problem, it seems that most people’s knee-jerk reaction is to take action right away. Our society has adopted the belief that any problem can be solved if enough time, effort, energy, and money is thrown at it.
For the most part, this is true – many problems are indeed resolved when enough action is taken. In many situations, doing nothing can indeed cost time, money, and even lives.
But while many problems can indeed be solved with prompt and decisive action, there are instances when choosing to do nothing may be the best option to take. Sometimes, the actions we think are solving a problem may only be exacerbating it.
Investors, both new and experienced, also make the mistake of thinking that more action is automatically better. However, there will be times when taking less, or no action, will ultimately lead to better outcomes.
There are times when “do nothing” is a valid course of action.
Understanding the “Do-Nothing” Alternative
Imagine you run an engineering firm that’s tasked with improving your city’s airport, specifically by revamping the runways in hopes of increasing air traffic capacity. The airport currently has 2 runways.
You present the following options:
- Option A: Build 2 new runways. Estimated cost is $100 million over 2 years. Projected 20% increase in air traffic capacity. Yearly maintenance cost of $2 million.
- Option B: Build 2 new runways and renovate 1 existing runway. Estimated cost is $145 million over 2 years. Projected 25% increase in air traffic capacity. Yearly maintenance cost of $5 million.
- Option C: Demolish 1 old runway and build 3 new runways. Estimated cost is $175 million over 3 years. Projected 35% increase in air traffic capacity. Yearly maintenance cost of $10 million.
While these options have their merits, there is one important question, and that is how these options compare to what’s currently being done at the airport. Without a benchmark, there’s no way to tell if these options will provide any real benefits or not.
Therefore, another option is included, the “do-nothing” alternative:
- Option D: Continue to use the airport’s 2 existing runways, with a yearly maintenance cost of $1 million. The airport will reach its maximum air traffic capacity within the next 5 – 6 years.
With this in mind, Options A – C now have the context needed to determine if they’re worth pursuing.
The Do-Nothing alternative is an integral part of engineering economics, which gives the option to reject all proposed engineering solutions and continue as is.
This may sound like a ridiculous option to have, but this helps determine if any action is necessary and if so, how much will be gained as opposed to taking no action at all.
Sometimes, carrying on with how things currently are proves to be the most sensible choice, especially if the proposals only offer relatively minor benefits, or fix problems that don’t need to be fixed at the moment.
That being said, in some circumstances the do-nothing alternative isn’t a valid option to have, such as when critical pieces of equipment need to be replaced, and doing nothing could result in catastrophe.
Before Making an Investment Decision, Establish a Do-Nothing Case
Fortunately, the idea of having a do-nothing alternative isn’t restricted just to engineering. It can be applied to almost any decision-making endeavour – investing is one of them.
Behind every investment decision is the implicit belief that the decision being made will result in a future benefit. After all, no sensible investor would make a decision that turns out to be detrimental.
While investors make decisions with the hope of advancing their goals/interests, it’s important to remember that not every decision is worth pursuing. An investment decision is only worth pursuing if it offers improvement relative to what an investor is already experiencing.
Say you want to invest in Real Estate Investment Trusts (REITs) to try and diversify your portfolio. REITs are a popular investment instrument and are an easy way for investors to get involved in real estate without getting too hands-on with it.
This may sound like a good idea, but by choosing to do nothing, you are left with a portfolio that already has dozens of different holdings, all of which are already performing quite well.
So, with this do-nothing alternative in mind, do you need to diversify an already diverse portfolio? If so, what exactly do you hope to gain?
By establishing a do-nothing alternative, investors can better understand the kind of impact their choices will have, and whether the resources they’re about to spend are worth the benefits they stand to gain.
Investors only have a limited amount of time, energy, and capital to work with, so they need to ensure that the actions they decide to take will ultimately advance their goals and interests.
Example of a Valid Scenario to Do Nothing: Market Crashes
Whenever market crashes happen, some of the first headlines to appear are “Investors sell amidst panic” or “Investors dump holdings as markets tumble” (for a simple guide on how to navigate such chaotic times, we discuss it here).
In these times of chaos, one of the very first things countless investors do is panic sell in an attempt to minimize their perceived losses. By doing this, they can reassure themselves that their portfolios will weather the storm because they’re doing something.
The problem is that panic selling is, at its core, a decision guided solely by emotion. After all, it’s in the name: investors dump their holdings because they are panicking, not because they performed some logical analysis.
Investors who sell their shares as quickly as possible are just as fast to rebuke themselves when capital markets return to normal, and the holdings they chose to dump return to pre-crash prices. Now, these investors are panicking to re-establish the holdings they previously divested.
This behaviour of “panic sell then try to re-establish your previous holdings” can be observed in virtually every market crash, yet investors fall for the same trap time and time again because they insist on taking action no matter what.
There are times when taking action during times of market upheaval makes sense, but many investors fail to ask themselves if this applies to them. Not all investors are affected equally during times of chaos – some may need to take quick action, while others can simply afford to wait things out.
Bouts of volatility eventually subside, and the investors who choose to do nothing usually emerge in better condition than those who decide to succumb to the chaos.
When in Doubt, Don’t Take Action Right Away
In a world where all of us are pressured to take action right away, it’s increasingly becoming unpopular to say that you plan to sit and observe before doing anything.
Being a successful investor sometimes means going against conventional wisdom, and one of those instances is choosing not to do anything right away despite others telling them otherwise.
As an investor, understand that it’s alright not to take action right away if you don’t feel that it’s the best option. Choosing the do-nothing alternative doesn’t always mean no future action will be required – it could also mean deferring action for now to deliberate further.
Knowing when not to act is just as important as knowing when to do so. Taking action too soon, especially if not enough thought has been given to it, could put investors in a very deep hole.
Wrapping Up
Many investors are obsessed with taking action, and rightfully so. After all, the actions that an investor takes, or fails to take, have a direct impact on their portfolios.
However, there will be times when choosing to act may not be necessary, or worse, may even set investors back. Sometimes, the best thing to do is to do nothing at all.
By establishing a do-nothing alternative when making decisions, investors can better understand if the choices they are presented with will give them a worthwhile benefit compared to carrying on with how things currently are.
Taking quick, decisive action as an investor is important, but knowing when to sit still and do nothing at all is just as crucial.
