Oct 29, 2019
This week, I’m talking about behavioral finance blunders. Essentially, behavioral finance looks at how your psychology, your emotions, and your biases impact your decisions and your behavior when it comes to your money. Because our decisions about money, investing, and retirement can impact us for the rest of our lives, we must be especially on guard to make careful, self-controlled, unemotional decisions as often as possible. That means having a working knowledge of behavioral finance and the forces working in the background on our decisions.
So this week, I’m focusing on some of the biggest blunders of all so you can be on guard!
Today, I’m talking about choice overload. You experience this first hand whenever you walk down the wine aisle at the grocery store, and you don’t already know what you’re looking for. Why are there 42 different pinot noir choices, all with different attributes, price points, pretty labels, and AVA regions? It’s downright overwhelming.
The same is true for investing. There are endless ways to invest your money, and I commonly see the choice overload problem rear its ugly head in 401k plans. I’ve seen some plan lineups that have 85 different funds. When you have a lot of different choices, what ends up happening is you feel overwhelmed and you end up making no decision at all.
There is well-documented research to back up the choice overload problem, especially when it occurs with your 401k plan at work. Plans with more options actually have lower participation among employees, and those who do participate in the plan, end up saving at lower rates compared to plans that have a more manageable 10-15 investment choices.
So the next time you’re overwhelmed with the amount of choices thrown at you, understand that the temptation is to make no choice at all and do nothing. Understanding that a “do nothing” choice is the temptation will hopefully help you press on in making a better decision.
But if doing nothing means you’re not going to participate in your 401k plan or save less, you’re obviously making a big mistake with your retirement. So when you are faced with a choice, seek out help from someone who can help you. In the case of your 401k plan, chances are you have access to an advisor who can help you, or some type of easy auto-pilot option like a target date fund to pick from instead.
Just don’t let choice overload frustrate you into making a decision to do nothing.
That’s it for today. Thanks for listening. My name is Ashley Micciche and this is the One Minute Retirement Tip.
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