How Investors Can Conquer Choice Overload
An abundance of choice is not always a good thing. When browsing a supersized menu or battling a complex smartphone plan, we confront what is known as choice overload. Investors are not immune to its consequences either – and it can have a damaging influence on our wealth.
What is choice overload?
Choice overload (or ‘overchoice’) affects our abilities to make a decision because our cognitive process becomes overwhelmed by too many choices. Its effects are often fairly harmless, such as which sandwich to eat at lunch or what TV channel to watch.
Yet when it comes to our finances the outcome is more serious. Choice overload typically affects investors when they are unsure about which direction to take and when many of the options they face appear alike. This is not unusual. A fund that claims to find the best large cap US equity opportunities will look very similar to another fund that boasts comparable qualities.
In the Journal of Consumer Psychology, a paper entitled Choice overload: a conceptual review and meta-analysis1 found that “When moderating variables are taken into account the overall effect of assortment size on choice overload is significant”.
So how do we successfully wade through the deluge of choices that investors must typically navigate?
Whatever you do, do something rather than nothing
It’s easy to feel adrift in the investment universe. According to the World Bank there are 43,342 public companies in the world2. Perhaps surprisingly, there are even more open-ended investment funds in the world, investing in these companies, at just under 120,0003. In addition to this, tracking the performance of investments, by bundling them into disparate groups, are indices, of which there are believed to be around 3.7 million globally4.
The American psychologist Barry Schwartz (author of The Choice Paradox) echoes the view that too much choice has its downsides: “The fact that some choice is good doesn’t necessarily mean that more choice is better.”
But to meet our investment objectives and achieve our goals in life, we must make some decisions with our money. And we must summon some courage, because the effects of inflation mean that leaving all our funds in cash can be a poor option, as we explain here.
Narrowing down your choices
We can conquer the effects of choice overload by mitigating our options. It may be trickier to narrow down your choices – and costs – if you are a DIY investor but outsourcing the selection of investments to a professional team can help to limit cognitive overload.
Instead of analysing the merits of one fund or asset vs another, we can focus on our overall objectives and how much risk we are willing to take to achieve them.
As part of our drive to make investing more accessible we make it easier and more transparent for people to take the necessary steps with their money.
We offer investors a simple choice of seven portfolios. This is broad enough to cater for the risk preferences of most clients, with each providing the expert construction and diversification that has enabled all of our sterling portfolios to outperform their peer groups since launch.
You’ll still need to choose a portfolio that suits you best, but the tools and analysis we provide make this choice easier. Then you can aim to achieve your investment goals with confidence, knowing that we make the difficult investment decisions for you.
Please remember that when investing your capital is at risk. Past performance is not a guide to future performance.
1 Choice overload: a conceptual review and meta-analysis, by Alexander Chernev et al. https://www.researchgate.net/publication/265170803_Choice_Overload_A_Conceptual_Review_and_Meta-Analysis
2 World Bank figures 2018 https://data.worldbank.org/indicator/CM.MKT.LDOM.NO
3 Statista figures 2018 https://www.statista.com/topics/1441/mutual-funds/
4 Index Industry Association figures, 2018 survey https://www.businesswire.com/news/home/20181114005124/en/Index-Industry-Association-Survey-Reveals-3.7-Million
What is choice overload?
Choice overload (or ‘overchoice’) affects our abilities to make a decision because our cognitive process becomes overwhelmed by too many choices. Its effects are often fairly harmless, such as which sandwich to eat at lunch or what TV channel to watch.
Yet when it comes to our finances the outcome is more serious. Choice overload typically affects investors when they are unsure about which direction to take and when many of the options they face appear alike. This is not unusual. A fund that claims to find the best large cap US equity opportunities will look very similar to another fund that boasts comparable qualities.
In the Journal of Consumer Psychology, a paper entitled Choice overload: a conceptual review and meta-analysis1 found that “When moderating variables are taken into account the overall effect of assortment size on choice overload is significant”.
So how do we successfully wade through the deluge of choices that investors must typically navigate?
Whatever you do, do something rather than nothing
It’s easy to feel adrift in the investment universe. According to the World Bank there are 43,342 public companies in the world2. Perhaps surprisingly, there are even more open-ended investment funds in the world, investing in these companies, at just under 120,0003. In addition to this, tracking the performance of investments, by bundling them into disparate groups, are indices, of which there are believed to be around 3.7 million globally4.
The American psychologist Barry Schwartz (author of The Choice Paradox) echoes the view that too much choice has its downsides: “The fact that some choice is good doesn’t necessarily mean that more choice is better.”
But to meet our investment objectives and achieve our goals in life, we must make some decisions with our money. And we must summon some courage, because the effects of inflation mean that leaving all our funds in cash can be a poor option, as we explain here.
Narrowing down your choices
We can conquer the effects of choice overload by mitigating our options. It may be trickier to narrow down your choices – and costs – if you are a DIY investor but outsourcing the selection of investments to a professional team can help to limit cognitive overload.
Instead of analysing the merits of one fund or asset vs another, we can focus on our overall objectives and how much risk we are willing to take to achieve them.
As part of our drive to make investing more accessible we make it easier and more transparent for people to take the necessary steps with their money.
We offer investors a simple choice of seven portfolios. This is broad enough to cater for the risk preferences of most clients, with each providing the expert construction and diversification that has enabled all of our sterling portfolios to outperform their peer groups since launch.
You’ll still need to choose a portfolio that suits you best, but the tools and analysis we provide make this choice easier. Then you can aim to achieve your investment goals with confidence, knowing that we make the difficult investment decisions for you.
Please remember that when investing your capital is at risk. Past performance is not a guide to future performance.
1 Choice overload: a conceptual review and meta-analysis, by Alexander Chernev et al. https://www.researchgate.net/publication/265170803_Choice_Overload_A_Conceptual_Review_and_Meta-Analysis
2 World Bank figures 2018 https://data.worldbank.org/indicator/CM.MKT.LDOM.NO
3 Statista figures 2018 https://www.statista.com/topics/1441/mutual-funds/
4 Index Industry Association figures, 2018 survey https://www.businesswire.com/news/home/20181114005124/en/Index-Industry-Association-Survey-Reveals-3.7-Million
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