You’ve popped into the drugstore to pick up some cold medicine, but are now overcome by the sheer number of choices. Daytime or nighttime? Liquid or pill? With or without antihistamines, decongestants and pain relievers?
Don’t look now, but you may be experiencing analysis paralysis. This behavioral tendency can occur when we’re confronted with too many choices or tasks. The symptoms include:
- Fear of making the wrong decision
- Delaying decisions
- Sticking with the status quo by default
- Repeatedly analyzing existing alternatives
- Endlessly searching for new alternatives
While forgoing the right cold remedy might cause discomfort, analysis paralysis in investing can have far costlier consequences.
“The abundance of choice can be paralyzing,” says Mark Riepe, senior vice president at the Schwab Center for Financial Research. “But the longer you delay making decisions, the worse off you’re likely to be.”
The good news, Mark says, is that with a few relatively painless prescriptions—and some assistance from trusted advisors and the latest technology—sufferers of analysis paralysis can not only learn to make informed decisions more quickly and confidently but also reduce the number of decisions they need to make to begin with.
Prescription #1: Narrow the field
This is an important first step, as research shows that people are increasingly unlikely to act as their number of options increases. In one seminal study, shoppers presented with various varieties of jam were 10 times more likely to make a purchase when confronted with fewer options. (See “Less is more,” above right.)
“It’s the same for choosing investments,” Mark says. “The universe of bonds, exchange-traded funds (ETFs), mutual funds and stocks is huge—you need to narrow your choices to make your decision less daunting.”
Begin by asking a few questions: If you’re just starting out, what’s your time horizon—and how much money will you need when you get there? If you’re an established investor looking to add a new position, how will it fit into your existing portfolio; are there any asset classes to which you’re over- or underexposed? “You have to put each investing decision in the context of the rest of your financial life,” Mark says.
Too often, though, investors revert to rules of thumb—like don’t put all your eggs in one basket. Research published in 2001 by economists Shlomo Benartzi and Richard Thaler found that savers tend to spread their money evenly across all available options, rather than allocating among those that make the most sense for them.1
“It’s always struck me how people revert to rules of thumb in the face of analysis paralysis,” Mark says, “but there’s no real connection to their individual situation. It’s like taking the same medication no matter what your medical condition.”
Prescription #2: Trust your tools
Once you determine which types of investments are best suited to your goals, any number of online tools can help you make faster, more informed choices. Bond, ETF, mutual fund and stock screeners like those available at schwab.com allow you to create lists of individual funds or securities based on criteria such as dividend yield, market capitalization and/or sector exposure. The ETF Select List® and Mutual Fund OneSource Select List® include top picks from Schwab’s experts every quarter. Schwab Equity Ratings® grades securities on a wide range of performance measures. And Schwab’s Portfolio Checkup tool (schwab.com/portfoliocheckup) can help you identify asset classes to which you may be over- or underexposed. (For more, see “Your technology tool kit,” below.)
Prescription #3: Break big decisions into manageable bites
One study of 401(k) plan participants found that many left their funds in their former employers’ plans simply because they thought it would be too difficult or time-consuming to roll them over. “Because their money is already invested, these people probably feel a little less urgency to act, but in many cases they can get something that’s a better fit for their particular situation,” Mark says.
In cases such as these, Mark suggests an incremental approach:
- Determine whether you might be better off in an Individual Retirement Account (IRA) or your new employer’s plan by comparing fees, taxes and other key factors
- If you decide on an IRA, request the necessary paperwork and set aside time to complete it
- If you decide on your new employer’s plan, request the necessary paperwork and set aside time to complete it
For each step along the way, Mark recommends putting a deadline on the calendar. “It’s usually easier to take a series of small steps rather than one big one,” he says.
Prescription #4: Harness the latest innovations
Today, investors can automate everything from investment contributions to stop orders that limit their losses on a single security.
The latest step in this revolution is the so-called robo advisor. Technology platforms such as Schwab Intelligent Portfolios® (available through Schwab Wealth Investment Advisory, Inc.) use algorithms to help investors allocate and continually manage their savings across a range of assets, based on their own needs and goals. What’s more, some robo advisors can make investing more tax efficient by strategically realizing capital losses in order to offset capital gains—a process known as tax-loss harvesting.
“While Schwab Intelligent Portfolios was designed as a total portfolio solution, it can also streamline many of the decisions most likely to cause investors angst,” Mark says.
Prescription #5: Reach out
When in doubt, Mark says it can be helpful to talk with people who have been in situations similar to yours. “You can learn a lot—and avoid some of the biggest missteps—through these shared experiences,” he says.
That doesn’t mean delegating your most important financial decisions to people without the necessary expertise, of course. Sometimes there’s no substitute for a qualified financial professional who can help point you in the right direction—particularly when dealing with a specific issue.
Prescription #6: Keep evaluating
After your mind is made up and you move from analysis to execution, it’s important to create a process not only for making a decision but also for evaluating whether it was the right one.
“Nobody gets it right all of the time, and of course people’s goals change,” Mark says. “So, you need to be willing to take stock—and change course—when your action plan no longer makes sense.”
And if you’re still having trouble making up your mind, consider cost. While it shouldn’t be the driving force behind every financial decision, it can be a critical differentiator, all other factors being equal. “It’s so easy to compare similar investments these days,” Mark observes, “and any cost savings you realize can really add up over the span of your working lifetime.”
1“Naive Diversification Strategies in Defined Contribution Saving Plans,” The American Economic Review, 2001, Vol. 91, No. 1.
What you can do
- Clients: Find ever more investment analysis tools under the Research tab.
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- Call 800-355-2162 to discuss your investment plan with a Schwab Financial Consultant or visit a branch near you.