There are thousands of investment vehicles in the marketplace today. These include individual stocks, U.S. treasury bonds, mutual funds, exchange-traded funds, options puts/calls, forex trades and so many more; it’s enough to make you not want to invest at all. In psychology, this falls under the concept of “choice paralysis.”
This is the idea that when people are given a wide variety of choices, they are more likely to delay choosing out of fear of picking the “wrong” one. Whether it’s a diet pill, choosing a car, what investing choice to make or any number of other options, it doesn’t matter. The overabundance of choice means people are less likely to actually make a decision in the first place.
A study performed in 2000 illustrated the point using jams. Columbia University professor Sheena Iyengar and Stanford University professor Mark Lepper set up a booth at Draeger’s Supermarket in Menlo Park on two separate days. The first day, they offered a selection of 24 jams. On the second day, they offered a selection of only six jams.
The results were fascinating. More people were attracted to the stand with 24 jams than the one with six options by a wide margin. However, only 3% of the people who tried jam at the 24-option stand purchased a jar. In contrast, 30% of the customers who tasted at the six-jam stand purchased a jar. An interesting note to this study is that people on average tried only one or two jams, despite the fact they were able to taste as many as they wanted.
You might be wondering how a study involving jam relates to investing. Let’s replace the jam jars with mutual funds you can choose as part of your employer-sponsored 401k. This fictional employer doesn’t offer target-date funds; instead, they offer you information packets on each of the more than 30 fund options that you’re able to select. The depth of information is overwhelming, and as you delve deeper into reading the prospectuses and historical performance it’s easy to get overwhelmed and not make a decision at all.
We understand choice paralysis at Financial Freedom. The stock market is a scary place for beginners, and that’s why we offer a variety of daily and monthly content. Designed for the investor who’s taking his or her first steps into the market, readers receive recommendations for a variety of stocks and ETFs across a variety of sectors.
These are momentum stocks, emerging markets stocks, growth stocks, energy stocks and value stocks. The important part, however, is that you’ll receive specific guidance every month. Recommendations that help filter out the noise and narrow your focus on a few key stocks or industries, all with the express aim of giving beginning investors a diversified portfolio.
You’ll get a good education in investing from reading Financial Freedom Magazine as well. Each issue includes timely and informational articles about current market conditions, new investment vehicles, and planning for your financial freedom.
This is all targeted toward you, the beginning investor, and designed to avoid help you avoid choice paralysis.
Limiting your options is only one way to avoid choice paralysis. Fewer choices means you don’t worry as much about making the wrong one. More options might seem like a good idea, but not if it creates worry that you’re choosing the wrong option. That’s where the real problem comes in. People don’t choose, or take a really long time to choose, because they’re worried they’ll regret the choice later.
So how do you avoid choice paralysis when it comes to investing? One of the key things to remember is that no investment move is forever. If you purchase stock in International Business Machines (IBM), not a single person will say you have to hold onto that stock for the rest of your life. You could sell the stock the very next day if you regretted the move; you might get a net loss or a net gain, but the key thing is you made a choice.
This is in contrast to the person who reads the financial news every day, watching the market go up and down like a seesaw, and refuses to invest any money for fear of making the wrong choice. I’m not going to pretend losing money is a good thing, but making a decision and committing to investing is better than sitting on the sidelines waiting for “the perfect moment” to start.
The French philosopher Voltaire once said, “The perfect is the enemy of good,” and choice paralysis can have put you in the position of overlooking good and striving for perfect. So what can you do to avoid always searching for the perfect? Learn to recognize good decisions, remember that no investing move is forever and don’t sacrifice the good in pursuit of the great.