The following is a sponsored post. Please see my disclosure statement.
We are enticed by choice, but more choices don’t always improve our decision-making process or lead to better decisions. In fact, we tend to make bad decisions and often end up with buyer’s remorse, while others struggle with the very act of deciding.
Nowadays, investors are spoiled for choice, but does this benefit us? We love having more options, but research shows that too much choice can result in analysis paralysis (which prevents people from making decisions), poor decisions and buyer’s remorse.
What is Analysis Paralysis?
Deciding between different options takes time and energy. Some people will delay or avoid making decisions when faced with too many options. Important purchases require us to consider all options carefully, but we rarely find the time to do so. A delayed decision when investing could result in a loss of capital, yield or returns.
Too many options can compromise decision quality. More choice can overwhelm us, which may result in snap judgments instead of rational decisions. A key factor influencing your investment returns is asset allocation. Investors tend to make poor asset allocation decisions when faced with the large number of funds they have to choose from. This could have huge consequences down the line.
Studies have shown that investors ended up choosing funds they perceived to be simpler, when faced with a large number of options: Investors opted for fixed interest or money market asset classes over equity, regardless of the risk profile or time horizon.
“Why did I buy this?”
More options make us more insecure about our decisions. We believe there is always something better on the market and blame ourselves for making the wrong choice. The probability of regretting your decision tends to increase with the number options you start with, even if your initial choice was the best.
Investor’s with buyer’s remorse can end up switching, which can result in huge losses. Switching can be free and easy (if you’re invested through an investment platform), but the long-term effect on value may lead to losses.
Judging an investment on current performance may result in buying high and selling low, which can lead to a wide performance gap. You will need to stay invested long enough to reap the benefits of a particular manager’s investment approach. By switching you may find that your investment doesn’t perform as well as the fund it is invested in.
In the end, moderation and understanding your investment environment is key. Keeping up to date with investment news and any big economic changes worldwide can provide you with the information to make sound decisions. Too much choice is overwhelming and too little choice restricts us. We may love having choices, but more is not necessarily better.