Less is more. Why In-N-Out works
“I’ll have a DOUBLE-DOUBLE, FRENCH FRIES, and a VANILLA SHAKE”
-me, making easy decisions
I recently tried to shop on Lazada. I typed ‘cushion’ into the search box, and it returned 963,138 items. Did I want the nautical stripes, flamingo print or geometric shapes? I gave up after scrolling to page 3. All these choices and all these decisions — and all I wanted to do was buy one cushion.
Turns out, I’m not alone. More options do not always equal better choices and can often lead to inaction. There was a study done by Columbia Professor Sheena Iyengar on the effects of increasing the amount of choices for consumers. She set up a table displaying gourmet jam, and changed it periodically to either 6 varieties or 24 varieties. There were more customers intrigued by the larger selection, but when the time came for people to actually open their wallets, those who saw the smaller display were 10x more likely to buy jam.
Professor Iyengar found that the same phenomenon applied to investing in retirement plans. She discovered that when a US retirement 401(k) plan offered only 2 investment options, 75% of employees participated. But when 59 investment options were available, the participation rate dropped to 61%. Interestingly, for every additional 10 investment options available, the average 401(k) participant’s equity allocation fell by 3.28%. (Source: Business Insider)
Investing today comes with many choices. There are over 4000 ETFs and 8000 mutual funds globally, and that’s just a start. When you add in all the share classes, there are over 25,000 fund options. Logically it seems that we are better off being able to choose from thousands of funds — or cushion covers.
What we need is fewer, better investment options. Offering model portfolios and taking asset allocation decisions out of the hands of retirement plan participants has proven to be beneficial. In a study done by John Hancock Retirement Plan Services, they found that those who invested in a single asset allocation portfolio earned better returns on average than participants who picked individual investment options to build their own portfolios — by an average of 1.06% annually over 15 years. That is a 43% difference on a portfolio earning an annualized return of 7% vs. 8.06% for 15 years. (Source: Investment News)
This is the paradox of choice: The confusion and complexity that accompany extensive choices may actually hinder your investment portfolio. Fund supermarkets may argue that offering more products can help you build diversified, optimal portfolios. But when you have too many funds in your portfolio, it may start looking like an expensive index fund. Choosing from fewer funds doesn’t need to be limiting; we believe that you can create globally diversified, optimal portfolios through just a handful of well-picked products. Having curated investment options is a better solution — as long as they are provided by someone whose interests are truly aligned with yours.
Originally published May 4, 2018 on endowus.com
