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“It's probably going to hurt you more than it will help you,” says Roberts, a certified financial planner and founder of Experiential Wealth, based in Cabin John, Maryland. Philip Chao says.
The dominant view in economics is that more options are “obviously” better.
In that regard, choosing an “enriched” environment allows consumers to “curate experiences tailored to their preferences,” says Brian, chief economist at the U.S. Securities and Exchange Commission's Office of Investors Advocates. Scholl writes.
But in the real world, he said, our experience deviates from this paradigm.
People get overwhelmed when they have too many choices. This is a behavioral finance concept known as “choice overload.”
CFP David Blanchett, head of retirement research at investment management firm PGIM, says people, especially those taking on something risky for the first time, are often at risk of making poor choices or regretting their decisions. He says he is afraid to do it.
This paradox of choice can have many negative implications for investors. Naive diversification, or distributing funds a little at everything. And they like high-profile investments, writes Samantha Lamas, senior behavioral researcher at Morningstar.
“These shortcuts can be disastrous mistakes,” she says.
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It's not just about investment. The paradox of choice can also extend to ice cream flavors and apparel, for example.
An early research experiment involved purchasing gourmet jams at high-end grocery stores. A 2000 study by Sheena Iyengar and Mark Lepper found that a tasting booth with a large display of exotic jams (24 varieties) had more customer interest than a small tasting booth with six varieties. It is said that However, customers who saw a small display were 10 times more likely to purchase jam than those who saw a large display.
Given these behavioral biases, retailers and others are evolving and consumers are now less likely to experience choice overload in the real world, says Betterment's vice president of behavioral finance and investing. Dan Egan said.
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However, suppose an investor wants to save money in a taxable brokerage account or individual retirement account. There are usually hundreds or even thousands of options to choose from and compare several characteristics, such as cost and performance.
“There are literally more options out there than will work for you,” Egan said.
Experts say it's a little different in the context of 401(k) plans.
DIY enthusiasts may have at most 10 to 24 investment options to choose from, reducing selection friction.
Additionally, most employers automatically enroll workers in a target date fund, a one-stop shop for retirement savings. The fund is generally well diversified and appropriately allocated based on the investor's age. This eliminates most of the decision making.
If you don't give people easy choices, “it becomes really difficult for them,” Blanchett said.
After all, experts say, long-term investors who are paralyzed by the options available to them should make the process as simple as possible when getting started investing.
Experts say most people are likely to invest in a well-diversified mutual fund, such as a target-date fund or a 60/40 balanced fund (60% allocated to stocks and 40% allocated to bonds). That's what it means.
“Either one of them [funds] It’s a great place to start, as opposed to putting all your money in cash or not investing it at all,” Blanchett said.
Even within the TDF and balanced fund categories, there can be dozens of different options. Experts recommend finding a relatively low-cost provider like Vanguard Group. (You can check this by comparing the “expense ratios” of different funds.)
Another approach is: For example, if you open a brokerage account at Vanguard, Fidelity, or Charles Schwab, use his TDF or Balanced Portfolio at each, says Blanchett. In these cases, most of the investment decisions are left to professional asset managers, and the larger providers are generally of higher quality, he said.
“Do I need to buy all the ingredients to make a cake? Or is it okay to just buy a cake and eat it?” Chao said.
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