There are a million things to love about having choices. The modern world loves freedom and choice, and so we tend to only focus on the positive aspects. But does more choice always mean more freedom? And how does having too much of a good thing affect us when it comes to making important money choices?
We are increasingly being asked to make more choices in our daily lives, where we would have otherwise had little to no option. Too much choice can be overwhelming. Life is messy. Sometimes more choice is better, but often it can be worse.
When it comes to your money, the stakes are even higher. The paradox of choice depends heavily on context.
Too Much of a Good Thing
An abundance of choice can often lead to anxiety, depression and loneliness. My time in financial services has left me with the conviction that sometimes less choice is actually more freedom.
One negative effect of too much choice is paralysis, instead of liberation. In a study of Vanguard 401(k)s, researchers found for every 10 mutual funds that were added to a plan, 10% fewer people participated. In a follow up study, they found that increasing the number of funds offered also influenced asset allocation to be too conservative.
We can end up less satisfied and in worse shape than if we had fewer options. With lots of options, it's easy to “imagine” you could have made a better choice. You're plagued by the idea that “I could have done better”. Suddenly you have regret. Expectations go up the more you keep adding options.
The result? Shame and blame. If you have hundreds of available options and pick what you perceive as the wrong one, guess who gets the blame? YOU. You are the problem. You blame yourself for picking the wrong choice. This is why too much choice can make people miserable.
Create the Illusion of Choice
What is the sensible alternative? A single option? No. If you have too few options, you get what's called single option aversion. Too many, you get paralysis, confusion and despair. It can be a confusing juggling act, I know. But the good news is, there can be a sweet spot.
Let me explain this in the context of another set of choices necessary in designing the current Truman Wealth Advisors Headquarters (aka my home office).
My current home office was once a playroom, scarred by years of marker accidents and home-made slime stuck in the carpet. It needed new paint and a new floor, badly. How hard could it be to pick a grey paint color? Harder than you think. There are not just 50 shades of grey, but 500 shades of grey. In trying to choose, I was immediately overcome with “choice overload”.
I have a dear friend at Johnston Paint & Decorating, who immediately helped me narrow down my choices. Another interior designer friend was then able to find the most gorgeous furnishings that fit my style and aesthetic. These women used their deep expertise, judgement and knowledge of their craft (and me) to help me feel really good about my choices.
But the best thing they did for me was simplify the options to a manageable selection. It gave me the “illusion of choice”, which it turns out is what I wanted all along.
How to Simplify Your Money Choices
Modern finance “assumes” that investors have little difficulty making financial decisions and are well informed, thoughtful and consistent. It’s also assumed that investors are not confused by how information is presented and are not influenced by emotions.
Clearly, reality does not match this theory. Investors confused or uncertain about how to proceed become immobilized. When too many choices are available, inertia sets in. People fail to take action, even on things they want. This inertia can act as a barrier, stopping people from saving and making reasonable allocation decisions and necessary changes to their portfolios. And so they drift.
Have you ever felt depressed and frozen in examining your retirement investment options? One of my clients participates in a retirement plan that has 133 fund choices. Crazy, huh?! Too many choices can actually make you suffer, which leads to inertia, which causes you to miss opportunities.
The financial services industry is not necessarily helping investors by devising more investment options. There are currently tens of thousands of mutual funds, variable annuity and 401(k) subaccounts, and exchange-traded funds. Not to mention thousands of individual stocks and bonds. In a high stakes game, it is important to have someone to narrow down these complicated options for you.
Finding a Financial Partner
Choosing a partner, managing your physical health, and investing your wealth are areas where you NEVER want to experience paralysis, regret or self-blame. There is just too much to lose. So it’s important to work with someone to truly help you understand what true wealth means to you and how to point your money towards what your values are.
Managing your money is certainly easier if you have a plan and clearly understand the impact of your choices. It is even easier if you have a trusted partner advocating for your needs and weeding out the overwhelming array of choices for you. Like so many things, keeping things simple can bring a sense of great ease and comfort to your life.
So you have a simple choice right now. Continue to navigate the complexity of financial services on your own and find yourself indecisive, unhappy and immobilized. Or hire a trusted financial partner to coach you on important money choices, so you can spend your limited time and brainpower on more important things.
Every day, I help people minimize their choices and act as a fiduciary to make investment decisions on a client’s behalf. If you want to solve the paradox of choice for your retirement options, please do get in touch.
And once your finances are simplified, you can always decide to redecorate your home office if you feel the need to add a dash of complexity back into the mix.