My husband and I recently committed to making more conscious choices about our food. We try to buy organic options, limit processed foods and consume meat that is sustainably and responsibly sourced.
Steering clear of any discussion on the merits of these choices, they had one unexpected consequence for us: They made grocery shopping so much simpler. Which fish should we grill tonight? Only the mahi-mahi is wild right now. Done! We go to fewer stores. We have eliminated a stressor we didn’t even know we had.
Recently I was in a pinch. I needed relish for a barbecue and stopped at a nearby big chain store to quickly grab some. Relish—yes, we’re talking about the hot dog topping here—occupied no less than a quarter of an aisle. Why do we need so many different options for relish? And an even better question: How do we possibly choose one?
Barry Schwartz, a researcher, psychologist and author of the book The Paradox of Choice, calls this “choice overload.” He writes, “As the number of options increases, the costs, in time and effort, of gathering the information needed to make a good choice also increase. The level of certainty people have about their choice decreases. And the anticipation that they will regret their choice increases.”
As you well know, choice overload isn’t unique to grocery shopping. An increasing number of studies on the issue are showing similar, broad-based conclusions: An overload of options often leads to inaction or coerces people into making choices that are against their own best interest.
I consistently hear clients express exhaustion over financial choice overload. And too often, such overload erects barriers to prudent financial planning, keeps people from investing toward their goals, leaves assets vulnerable or clouds judgment around portfolio allocation decisions.
The Other Investment Numbers Game
Those who tracked the last financial crisis know that creativity in the financial services industry has been nothing short of prolific. Investing now comes with an overwhelming number of choices. CUSIP Global Services, the world’s largest provider of security identifiers, currently manages a database of more than 14 million global investment securities, reportedly adding 1,000 to 2,000 new listings each day.
And that’s to say nothing for the complexity within those securities themselves: the excessive use of jargon, the emotionally laden marketing pitches and the pages of fine print. I tried unsuccessfully to find data on the average length of a mutual fund prospectus. These are the fine-print bibles that the SEC catalogues online to help investors make informed choices. Lacking a better source, I pulled up the current prospectus covering the most commonly used U.S. large-cap fund at SB Capital Management. It was 227 pages.
The Power of Inertia
It’s hard to be confident that you have all the information, let alone understand it. Well-intentioned investors thus yield to inertia, failing to take action—even on decisions they want to make.
A recent study at Columbia University found that offering employees more investment choices in a 401(k) plan actually led to lower participation. The research finds that, on average, every additional 10 investment choices cuts participation rates by 2%.
Even worse than inaction is misguided action. A Rutgers School of Business, University of Texas-Austin and University of Pittsburgh study found that too many choices in a 401(k) prompted inexperienced investors to take on more risk than they would with fewer options. Maureen Morrin, who co-authored the study, observed that “when people perceive more variety, they consume more. The stocks funds are sticking out more as really different from each other, which attracts dollars to that asset class.”
Three Ways for Investors to Protect Themselves
There’s no indication that the myriad investment options will go away, so how can investors protect themselves?
- Get Help
Benjamin Scheibehenne, a research scientist at the University of Basel in Switzerland, cautions against a blanket conclusion that having too many choices is harmful, particularly since choice overload can easily be confused with information overload. In other words, sometimes choice paralysis can be a greater symptom of “the lack of information or any prior understanding of the options.”
This is where a wealth manager or CPA can be invaluable in helping you navigate your options and highlighting potential risks and benefits. Next time you are paralyzed by choice, consider whether it might be a sign that it’s time to consult an expert.
- Cut Through the Clutter
This is where it can help immensely to have an investment philosophy. For example, SB Capital believes (and data consistently supports) that highly traded, stock-picking mutual funds in many markets don’t stand a good probability of beating benchmarks after their costly management fees and high turnover ratios. By ruling out these funds, our universe of choices gets narrower, just like it did with my groceries.
Engaging in the financial planning process can also be of great help, since it helps whittle down what’s really important to you and provides a framework for making some big decisions now, with the commitment to gain more information and refine those decisions over time.
- Accept Compromise
This is the case for the “good enough” choice. Engineers build in their margin of safety; investors can do the same. Take the situation of investing new cash. Often investors will get caught up on timing. Is now a good time to invest? Or should I wait until the market is down? The waiting game is a dangerous one—look at all the anecdotal evidence of investors still waiting to get reinvested more than five years after the stock market bottom in 2009.
This is where averages can be your best friend. Look at how much you want to invest and commit to investing a little bit each month for the next six to eighteen months. No averaging approach will give you the absolute best result possible. But it can break through the paralysis of analysis and put you on the right path toward success. In any case, the amount of gains foregone by averaging isn’t likely to make a big enough difference for the important goals, like buying a home or sending your daughter to college.