Retail Investors, Out of Sync and Stymied by Choices

When State Street's Applied Center for Research recently asked retail investors what steps they needed to take over the next ten years to prepare for retirement, the number one response (40 percent) was to become “more aggressive.” However, when they analyzed the respondents’ portfolios, they found that cash was the number one allocation, at an average of 31 percent. More alarming, when asked to project their allocation 10 years into the future, respondents still chose cash as the dominant asset class. Clearly, these allocations seem out of sync with the stated long-term goal of becoming more aggressive. So what gives, especially as nearly two-thirds of these retail investors rated their current level of financial sophistication as advanced?

It could be that too many investment choices have resulted in cash paralysis. According to the 2012 MFS Investing Sentiment Survey, 40 percent of investors think investment products are “overly complex,” and 34 percent feel “over-whelmed” by the investment choices available.

Psychologist Barry Schwartz has demonstrated that too much choice leads to reduced happiness and a feeling of missed opportunities. As he writes in The Paradox of Choice, “Choice no longer liberates, but debilitates. It might even be said to tyrannize . . . the fact that some choice is good doesn’t necessarily mean that more choice is better.” And in Pension Design and Structure: New Lessons from Behavioral Finance, Sheena Sethi-Iyengar, Gur Huberman and Wei Jiang highlight reported that participation rates in company retirement plans decrease between 1.5 and 2.0 percentage points per every additional 10 mutual funds offered.

The paralyzing effect of too many choices was illustrated again when researchers conducted an experiment in a California grocery store involving a display of jams. In the first test, they featured 24 different jams to taste; on another day they displayed just six. The results? Although more shoppers stopped at the display of 24 jams, just 3 percent made a purchase. And while fewer shoppers stopped to sample at the table of six jams, 30 percent purchased a jar.

Investing doesn’t have to be an overwhelming shopping experience. Working with a trusted advisor, your personal shopper, can narrow your choices and align your investments with your risk tolerance and financial objectives to ensure you meet your short- and long-term goals.