How many options are too many?

What investment is right for you? Investing in 2019 is probably as confusing as it’s ever been. You have access to more information, more opinion, and as a result, more options than ever before. At first glance, this might appear to be a good thing, but studies have shown this isn’t necessarily the case.

In 2000, psychologists Sheena Iyengar and Mark Lepper published an interesting study that explored the idea of “choice overload”.

On one day, shoppers at an upscale food market saw a display table with 24 varieties of gourmet jam. Those who sampled the spreads received a coupon for $1 off any jam. On another day, shoppers saw a similar table, except that only six varieties of the jam were on display. The large display attracted more interest than the small one. But when the time came to purchase, people who saw the large display were one-tenth as likely to buy as people who saw the small display.

This study has been validated by follow up surveys and experiments that explore how the number of choices a consumer has access to influenced their happiness and satisfaction. The evidence appears to be pretty conclusive. We all think we want more options. However, the more options we’re presented with the less action we’re likely to take, and the more dissatisfaction and buyer’s remorse we’re likely to experience when we do.

It makes sense when you think about it.  When we’re only deciding between a couple of things, it’s much easier to decipher what’s best for us.  When the number of choices multiplies, how do we not fall victim to analysis paralysis?  We only want to make decisions that we feel are best for us, but that becomes exceedingly more difficult when trying to decide between dozens of seemingly viable options.  When that happens, no matter what we decide, it’s human nature to doubt and second guess ourselves.

Investment options and participation

This phenomenon has played itself out in the investment and financial planning world as well.

According to Business Insider, Iyengar found the same phenomenon applies to investing in retirement plans. Many people don’t participate in their company 401(k) plans. She conducted a study and concluded that once variables like age, income and company were controlled, the biggest reason for a decline in 401(k) enrollment was the over-abundance of choices.

When a 401(k) plan offered only two investment options, 75% of employees participated. When 59 investment options were available, however, the participation rate dropped to 61%.

Expanding on this study, Iyengar examined the impact that more investment options had on the 401(k) participants’ asset allocation. For every additional 10 investment options available, the average 401(k) participant’s equity allocation fell by 3.28%. Some neglected equities altogether.

Beyond the 401(k)

So we’re aware of the effects of too many options in something as simple as a 401(k) election.  These can add these issues to the growing complexity associated with making this decision alone. It stands to reason you only compound the problem when you amplify the noise.  And the noise has never been louder.

Where to invest, how to invest, what strategies hold up best over time, tactical investing vs. passive investing.  It’s no wonder that people who make their best efforts to take control of their financial wellness often wind up only more confused, frustrated, and overwhelmed in the process.

Let’s explore how we might simplify the process and stack the odds of success back into your favor.

Processes protect us

When talking to our clients and prospects, what we often find, is their decision making has less to do with the investments themselves, as much as it does with their process for evaluating them.  As they say, if you want better answers, start asking better questions.

As humans, our behavior is most often influenced by our emotions, rather than logic or reason.  The professional investment community is incredible at honing in on those emotions so they can serve their own interests.  You’ve heard the axiom that the market is driven by “fear and greed”.  Trust me, investment institutions on Wall-Street are very aware of this and have played on that fact to convince you to pour trillions of your hard-earned dollars into their products in the process.

Everyone wants financial stability, security, and prosperity.  When we read a clever marketing message that offering an “insider tip” to help us short-cut the process, it’s easy to fall victim to our greed instinct and enter into an investment we have no business being in.  On the flip side of the coin, “doom’s day” prognosticators fill your inbox with scary messages convincing you that the sky is about to fall and suddenly your fear instinct kicks in, forcing you to sell everything and load up on gold bars and ammunition.  This cycle is predictable and inevitable, and the only way you can really avoid it is if you’ve equipped yourself with a true process to filter the information you allow to enter into your decision making.

Consider how a doctor works with her patients.   She must stick to a strict set of rules to make sure they’re following the correct procedure, giving the right medication, and making sure the patient gets well.

This is a clinical diagnostic process to assure proper diagnosis before recommending medicine, surgery, treatment, etc.  She knows that if she fails to follow that strict process to identify all the critical information, they may harm the patient and violate their oath.

We expect any high-level professional, doctor, engineer, pilot, architect, teacher, or the like, to follow a strict set of processes and procedures to ensure proper compliance.  Yet often we neglect following this model for our own self-interest.

What investment is right for you?

If you’re serious about getting ahead financially, you must establish a set of operating principles to help protect yourself as well.  These operating principles will help you to gain clarity around what you want, what’s most important to you, how you want your money to serve you, and what tradeoffs you’re willing to accept to get what you most desire.

There are two primary qualifiers you must be able to address in order to know if a decision is really best for you or not. 

First, what do you want or need your money to do for you?

Second, what are the critical parts and information about any investment for it to accomplish what you want?

From a financial planning standpoint, there are 5 critical questions that can help you establish a foundation for your own personal decision matrix.

Here are those 5 questions, which we encourage you to ask of any professional advisor you’re considering taking advice from.

  1. Have you adequately reviewed my personal financial situation to make sure this recommendation is in my best interest?
  2. How will your plan affect my tax return each year and what future tax issues may concern me?
  3. What impact will your plan have on my income, liquidity, and healthcare needs in the future?
  4. How does your plan match up with my risk comfort level?
  5. How will your plan affect the transition of my estate to my heirs?

What do you want your plan to provide for you?  Income and cash flow?  Control and liquidity?  Maximum growth and potential for appreciation?  Some combination of these?  How do your decisions up to this point support those objectives?

There’s no right or wrong answer.  It’s specific to you based on where you are today, and what you want to accomplish in the future.  But it’s critical to have clarity around these questions so you that you can easily filter through what’s best for you, and what’s not.

No bad tools

We recently had work done at our house that required new drywall to be hung.  In order to properly hang the drywall, our contractor needed drywall screws and screwdriver.  While a hammer and nails might have gotten the job done, they weren’t what was most appropriate to do the job right.  Does that make a hammer and nail any less valuable than a screw and screwdriver?  No, of course not.  It’s simply a matter of the proper application of the right tool for the job at hand.

Your finances are no different.  While talking heads might try to lead you to believe that stocks, mutual funds, and equities are good, and all other options are inferior, or vice versa, this simply isn’t the case.  They’re all designed with a particular utility in mind.  If your priority at this stage of your life is to maximize growth and control over your assets, and you understand the risk associated, insurance probably isn’t your best bet.  On the other hand, if dependable cash flow and tax efficiency is your priority, high-risk equities and investments probably aren’t as appropriate.

No tool is inherently good or bad.  Only properly or improperly utilized and applied to the given situation.

Establish better processes for evaluating how your decisions align with helping you get the result you’re after.  Do this and you’ll be in a much better position to ensure that you only choose investments, strategies, and solutions that are right for you.

If you’re ready to review your existing plan, be sure to take advantage of a free strategy session with our team.  You can claim time on our schedule by clicking here.


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