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The paradox of choice

By Gabriella Macari
Reading time: 6 minutes

All DIY investors have something in common; they want to be in control. The good news is that in 2022, personal investors have all of the tools they need at their fingertips to ‘do-it-yourself’. The bad news is that there is so much choice out there that many of us just don’t know where to start. In this article, we discuss why, when it comes to choice, there can be too much of a good thing.

All DIY investors have something in common; they want to be in control. The good news is that in 2022, personal investors have all of the tools they need at their fingertips to ‘do-it-yourself’. The bad news is that there is so much choice out there that many of us just don’t know where to start. In this article, we discuss why, when it comes to choice, there can be too much of a good thing.

What’s the problem?

Having a diverse range of options available allows investors to find funds that fit closely (if not perfectly) with their search criteria. This is, clearly, good news. However, having too many options can make it difficult to make a decision. This is known as the ‘paradox of choice’.1

In simple terms, the concept of the paradox of choice is that having too many options leaves us feeling unsatisfied with our ultimate decision because we have had to exert more effort to choose. This additional effort may leave us feeling that we have not had sufficient time to consider all of the options fully or in as much detail as we would like and may make us focus on the opportunity cost of the options we did not select.

How does this apply to investing?

As at September 2022, there are over 5,579 funds, investment trusts and ETFs available to UK personal investors.2 That’s an enormous opportunity set to analyse and whittle down to find the best solution. Because let’s be honest, we all want to buy the best funds!

Let’s say that you’re looking for a European equity fund. At the time of writing this article, we checked three of the most popular fund platforms in the UK and found between 220 and 351 search results3. It is impossible for a personal investor to thoroughly research and assess each of these options and make an informed choice.

It’s no wonder that with so many options available in the market, and so much effort required to research them appropriately, 75% of investors rely on ‘best-buy lists’ to make decisions.4

Is it just about the effort it takes to review the funds?

Unfortunately, no. Howard Schwartz, who coined the term paradox of choice, also found that when consumers are faced with having to choose from too many options, they will be bogged down by considering the trade-off. The individual will spend more time worrying about the opportunities they are missing (i.e. the options they’re not choosing) than the potential of the opportunity they are choosing. The ‘freedom’ we gain by having endless choices can actually leave us feeling frustrated and dissatisfied; choosing one option has meant that we have had to reject all of the others.

This focus on the trade-off affects the satisfaction that we experience from our decision and when there is too much choice, we are more likely to be dissatisfied and to change our minds. In investing, this might look like churning your portfolio or selling out of a position and swapping to something else very shortly after buying in.

Why does this matter? Broadly speaking, making too many changes to your investment strategy too often is likely to be detrimental to your long-term performance. This is for two main reasons. First; trading costs can add up and eat into your returns if you make too many changes too often. Second; investment returns are not linear, they don’t follow a straight line with consistent month-on-month results, and so trading too frequently can mean that you miss out on key periods of performance.

In 2018, Morningstar ran a study and concluded that over a 15 year period, on average the outperformance of an active fund can be attributed to ‘critical months’ which make up less than 5% of all monthly periods measured. If those ‘critical months’ were excluded from the fund’s return calculations, ‘it would eliminate the fund’s outperformance over its benchmark.’5 This yet again demonstrates why it is futile to try and time the market and successful long-term investing relies on patience.

Is there a way to make it easier?

“…the fact that some choice is good doesn’t necessarily mean that more choice is better.” - Barry Schwartz, The Paradox of Choice: Why more is less

As demonstrated by the 2000 ‘Jam Experiment’6 (a research study that found that having just 6 jam options would be more likely to result in a purchase in a supermarket than having a choice of 24 or 30 jams), reducing the selection from which to choose from can make it easier to make a decision.

You can see common examples of people using this strategy all of the time if you look hard enough; whether it’s Mark Zuckerberg or the late Steve Jobs wearing the same outfit on repeat, or your work colleague that has an identical ham and cheese sandwich for lunch, 5 days a week.

At TILLIT, our Investment Committee and Fund Selection team use their experience and expertise to filter the market and apply a rigorous process to find what they believe to be best-in-class options across asset classes, regions, structures and investment styles. This way, you still have a broad range of choice, but with a much more manageable number of options in each category so that you can find the right investments for you, regardless of your strategy.

Whilst it may sound counterintuitive, having fewer options can actually lead to better and more informed investment decisions. Why not browse our Universe and see which funds, investment trusts and ETFs have been selected by our Investment Committee. At TILLIT, you’re in control with experts in your corner.

1The term ‘paradox of choice’ was coined by psychologist Barry Schwartz in his 2004 book of the same name. Check out Mr Schwartz’ TED talk for a great 19 minute summary.
2 FE Analytics, August 2022.
3 Hargreaves Lansdown, Interactive Investor & AJ Bell Youinvest. [accessed 27.09.2022]. Detailed below:

- Hargreaves Lansdown search (sectors: Europe ex-UK, Europe incl-UK, European Smaller Companies) 220 Search results.

- Interactive Investor ‘Fund Search’ tool (search term: Europe) 278 matches.

- AJ Bell Youinvest screening tools (7 separate searches). Total: 351
Fund Screen Europe ex-UK, 155 results.
Fund Screen Europe incl-UK, 26 results.
Fund Screen Europe Smaller Companies, 25 results.
Investment Trust Screen (AIC Sector: Europe), 7 results.
Investment Trust Screen (AIC Sector: European Smaller Companies), 4 results.
ETF Screen Europe ex-UK, 51 results.
ETF Screen Europe ex-UK, 81 results.
ETF Screen Europe ex-UK, 2 results
4 Boring Money: Financial communications are broken, November 2019 [accessed 27.09.2022]
5 Morningstar: Is there a good time to buy or sell actively managed funds? [accessed 27.09.2022]
6 When Choice is Demotivating: Can one desire too much of a good thing? [accessed 27.09.2022]

Date of publication: 6th October 2022

The information in this post is not financial advice, it is provided solely to help you make your own investment decisions. If you are unsure about whether an investment is appropriate for you, please seek professional financial advice. You can find more information here.

When you invest you should remember that the value of investments, and the income from them, can go down as well as up and that past performance is no guarantee of future return.

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