Having plenty of choice when it comes to picking your investments could allow you to align your portfolio with your specific needs, values, and goals.
However, as with many things in life, you can have too much of a good thing.
If you’re confronted with countless options, you might experience “choice overload”, sometimes called the “paradox of choice”. This can feel overwhelming and lead to poor investment decisions.
Keep reading to learn how choice overload could affect your behaviour and discover five practical ways to overcome this bias.
Too much choice could lead to decision paralysis
In today’s modern world, we’re bombarded by a wealth of choices every day, from where we buy our lunch to what we watch on television.
On the one hand, greater choice gives us more freedom to shape our lives as we see fit. However, a 2000 paper by Iyengar and Lepper, titled, ‘When choice is demotivating: Can one desire too much of a good thing?’, revealed that too much choice often leads to inaction.
In the study, shoppers were presented with a display containing either six or 24 varieties of jam and given a discount coupon to spend on any purchase they made. Those who saw the limited-choice display were much more likely to buy jam. The researchers concluded that too many options led people to make no decision at all.
Barry Schwartz drew on this research in his book, The Paradox of Choice: Why More is Less, in which he challenges the assumption that more choice leads to better outcomes. In fact, Schwartz found that having too many options made people less likely to be satisfied with their decisions.
Choice overload could hamper your progress towards your investment goals
When it comes to investing, choice overload could affect your behaviour in several ways, including:
Inertia
If you feel overwhelmed by the number of available options, this could result in decision paralysis.
Such inaction could mean you miss out on potentially lucrative investment opportunities. Alternatively, you might hold on to investments when they are no longer serving you.
If you fail to invest at all, you could lose a valuable opportunity to build your investing skills, knowledge, and confidence. Moreover, the value of uninvested wealth held as cash savings could be eroded by inflation over time.
Second-guessing decisions
When there are lots of options on the table, you might find yourself constantly questioning whether you’ve made the right decision – Would another investment have delivered higher returns? Have you diversified your portfolio effectively?
This could result in “buyer’s remorse”, lower satisfaction with your investments, and excessive stress.
Emotional buying and selling
If you’re overwhelmed by choice and lack confidence in your decisions, you might be more inclined to panic buy or sell your investments to avoid missing out on a “better” option.
Unfortunately, buying and selling investments frequently could make it harder for you to achieve your goals due to higher transaction costs and potentially, lower returns.
5 clever ways to overcome choice overload as an investor
- Set clear investment goals – Decide what you want to achieve and focus on investing for the long term. Having clear goals in mind could make it quicker and easier to filter out unsuitable options.
- Limit the number of options – Narrow down your choices by identifying your key investment criteria. This could reduce overwhelm by simplifying your decision-making process.
- Embrace “satisficing” – According to Schwartz, some investors constantly seek the perfect opportunity. These “maximisers” are particularly vulnerable to choice overload as they feel the need to consider every available option. In contrast, “satisficers” are happy with options that are good enough. So, if an investment meets your criteria, there’s no need to keep exploring alternatives.
- Establish regular reviews – If you constantly check how your investments are performing, you may be more likely to second-guess your decisions and make comparisons with the latest trending opportunities. Instead, establish regular reviews – once a quarter is a helpful rule of thumb – and avoid looking at your investments in-between.
- Seek financial advice – A financial planner can act as an objective sounding board and help you overcome any decision paralysis or low confidence you may feel about your investments. They also have the knowledge and experience to help you evaluate different options and align your portfolio with your circumstances, risk tolerance, and long-term goals.
Get in touch
If you feel overwhelmed by choice when it comes to investing, our financial planners in Bristol can review your portfolio and help you make informed decisions with confidence.
Email helpme@aspirellp.co.uk or call 0117 9303510.
Please note
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
All information is correct at the time of writing and is subject to change in the future.
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.
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