Do we have too many choices?
Photo: Aimee Low. Source: Morguefile
When we face a shelf with dozens of varieties of meat, it’s hard to decide what to buy. It’s much easier when just need to choose from a few. Academics call this “choice overload.” Walk into a drug store and look at the selection of shampoo: it’s overwhelming. Choice overload can hit kids when they’re deciding which college to attend or what to major in.
And it applies to investing. When company 401(k) plans have over a dozen investment funds, fewer people sign up than when they only have two or three. Also, the more choices folks have, the more likely they are to put their money in cash. When we face too many options, we procrastinate and then act impulsively, often against our own long-term interest.
One way to overcome choice overload is to narrow things down, to look at categories rather than individual items. Also, it helps if we work into the process gradually. Anyone who has bought a new computer or new car knows that there are a dizzying number ways to customize the purchase. If we start with basic options and move into more complex areas, we’re more likely to stay engaged.
Just don’t get discouraged just because there are so many alternatives. In many ways, this is a golden age for investors. We can get broadly diversified, global portfolios with the click of a mouse. But it’s critical to get going. Because when it comes to investing, the worst choice to make is never to start.
Douglas R. Tengdin, CFA
Chief Investment Officer