Investing Overload: How Too Many Choices Can Hurt Your Portfolio

The Paradox of Choice

Humans like choice. Indeed it's a bedrock principle of autonomy and freedom. But when it comes to investing having too many choices can be bad. "Most likely it will hurt you rather than help you," said Philip Chao a certified financial planner and founder of Experiential Wealth based in Cabin John Maryland.

Choice Overload and Behavioral Biases

Humans get overwhelmed by too many options a behavioral finance concept known as "choice overload." Often people especially those new to something that carries high stakes are fearful of making a bad choice or regretting their decision. This paradox of choice can have many negative impacts on investors: inertia or doing nothing; naïve diversification or spreading money across a little bit of everything; and favoring attention grabbing investments.

The Choice Paradox in Everyday Life

It's not just investing: The choice paradox can extend to things like ice cream flavors and apparel for example. Among the early research experiments: buying gourmet jam at an upscale grocery store. According to that 2000 study by Sheena Iyengar and Mark Lepper a tasting booth with a large display of exotic jams (24 varieties ) received more customer interest than a smaller one with six varieties. But customers who saw the small display were 10 times more likely to buy jam than those who saw the larger one.

The Evolving Retailer Response

Given these behavioral biases retailers and others have evolved making it less likely consumers will experience choice overload "in the wild" today. However when it comes to investing the overwhelming number of options can still pose a challenge for investors looking to save money in a taxable brokerage account or individual retirement account.

Simplifying the Investing Process

Ultimately long term investors who are paralyzed by their available choices should make the process as simple as possible when starting out experts said. For most people that's likely to be investing in a well diversified mutual fund like a target date fund or a 60/40 balanced fund (which is allocated 60% to stocks and 40% to bonds). Even within these fund categories there can be dozens of different options so experts recommend seeking out a provider like Vanguard Group with relatively low costs.

Offloading Investment Decision Making

Another approach is to open a brokerage account at a reputable provider like Vanguard Fidelity or Charles Schwab and use their respective target date funds or balanced portfolios. By doing this investors offload most of the decision making to professional asset managers while still benefiting from high quality options.