The paradox of choice.

If you live in The States you’ve probably been to Costco. While the store is practically busting at the seams with stuff, Costco typically only carries about 4,000 unique products behind its walls. Your much smaller local grocery store, however, carries ten times that amount. So what’s the deal? 

Costco understands psychology and the paradox of choice.

If you’re like me, you’ve gone to Costco to get a box of cereal and some chicken, but an hour later you walk out $200 poorer with a cart full of Paydays (best candy bar EVER), pretzels you didn’t even want, and a three-gallon tub of mayonnaise that will expire before you finish it.

I’ve blogged for over a year now about how I am going to start investing for the short term. Wanna know how much effort I’ve put towards said goal? Not one freakin’ ounce. I don’t consider myself a lazy person, but when it comes to investing outside of retirement, I shut down.

There are too many different avenues to explore. Which stocks, bonds, or mutual funds should I buy? Is real estate going to appreciate over the next 8 years? Should I invest in gold, silver, or other precious metals?

Instead of answer the questions above, I do nothing.

Research indicates 401k plans that offer dozens of different investment options, on average, have fewer people contributing to them than 401k plans with only a handful of choices.

I bet some of you are guilty of this in one way or another, aren’t you? Maybe you haven’t started paying down your debt aggressively because you feel like you don’t know where to start. Maybe you haven’t contributed a dime to retirement because you can’t figure out which fund you should buy. Maybe you changed your major in college 87 times because you kept re-discovering what you wanted to do with your life.

I’m sick of being paralyzed. I met with a Financial Planner over the weekend and I’m ready to punch my short-term investing goal in the face. It’s about freaking time.

Has the paradox of choice ever affected you?  If so, in what ways?

p.s. I am working on getting a link to our TV interview from the producers for those that couldn’t catch it yesterday. As soon as I have that, I’ll post it up here and give you my two cents on the thing.

35 thoughts on “The paradox of choice.

  1. Be careful about hiring financial planners. Many of them are glorified salesmen/women whose sole interest is the commissions they get from putting you into high-fee investments. Mike Piper’s site (obliviousinvestor.com) has a lot of good advice on finding a financial planner, as well as investments in general. He’s by far the best advisor I’ve encountered online, he doesn’t ask for a dime from you other than to buy his very reasonably priced books, and I’m proud to consider him a friend.

    For the record, I don’t use an advisor. Never have, probably never will. I also don’t hold any investments other than my retirement accounts, and I hold no individual stocks. But I see no reason why your investment strategy outside retirement (I assume you mean taxable accounts) should differ considerably from your strategy within retirement accounts. The main thing to consider is tax placement, and for that see: http://www.bogleheads.org/wiki/Principles_of_Tax-Efficient_Fund_Placement

    Otherwise, I think you’d be just fine with something like an allocation of Vanguard Total Stock, Total International, and Total Bonds, perhaps with a part of your bonds in TIPS. Or the Fidelity Spartan equivalents. Problem solved.

    I don’t belong to Costco either.

    • Funny thing. I had a one on one convo with Mike Piper and he was one of the CFPs that gave me a few funds that met my needs. I then ran that info by some CFPs with USAA that I know on a personal level and they echoed Pipers thoughts. Got some great advice for free. One of the many advantages of going to the bloggers conference.

      • You’ll find also that Mike is very approachable, either via email or by commenting on his blog. I’ve contacted him that way numerous times, and he’s never failed to reply.

  2. The paradox of choice hits me the hardest right now, as I’m trying to decide exactly what I want to do career-wise. I know a couple jobs that I don’t want to do (sales), but there are so many choices out there of what I may/may not/have no idea want to do, that I’m having a problem applying. Or knowing exactly what part of the country I want to live in.

    And I will say that it also makes going out to eat hard, which is why I tend to get the same things all the time. It’s not that I don’t want to try something new, it’s just that there are too many choices to pick from, so I go with the standard.

  3. Additionally, with the immense amount of choice Americans have nowadays, whether it’s at the groceries, buying a new car, or just flipping though channels on the TV we are more often unsatisfied with the choices we make. Since there are so many choices we COULD have made we spend our time thinking what could have been rather than just enjoying what we have. If you want to read any further into the topic I suggest looking at “The Art of Choosing”, a great book by Sheena Iyengar.

  4. You need to figure out what you’re going to do with the money and how risky you’re willing to be. Your advisor can’t help you unless you figure those questions out.

    If that’s a house down payment, I wouldn’t invest it in anything that could possibly lose value, unless you’re flexible about when you buy a house… and even then, I would invest conservatively, like BND or VCSH. Personally my house down payment is spread across a couple CDs.

      • Just my thoughts as I’m no professional, but I would wait for a pullback on both before buying in. Both are at 3 year highs which is to be expected but if you are buying here all you are doing is buying other peoples profits. There is a chance we could go higher here but I don’t see it. Buy the fear, sell the greed. That’s how I roll anyways.

  5. I second the “Millionaire Teacher.” Its an easy and persuasive read. If you have more time, take a look at some of the classics: “A Random Walk Down Wall Street,” “Rich Dad, Poor Dad,” and “The Richest Man in Babylon.” There are many vehicles for short term investments. Do something you know.

  6. Thanks for trying to find the link to your show! I wanted to watch yesterday, but at 2 p.m. NBC was showing “Who Wants to Be A Millionaire.” I assumed that was not the right show.

  7. I just want to comment on the Paydays (ironic that should be your candy of choice). If you have candy corn and peanuts, 2 candy corns to a peanut taste just like a Payday. It’s good information in case your favorite store makes the idiotic choice of not stocking Paydays.

  8. I really resonate with this! I need a new pair of skis, a new laptop, maybe a new camera, and a real 401k strategy (instead of just the defaults). But I have too many options for each and not a clear enough sense of what I need and what will do that for me. So… I just ignore the situation. I call it “analysis paralysis.”

  9. On the subject of the paradox of choice, this Ted talk by a professor at Columbia Business School is fascinating – http://www.ted.com/talks/sheena_iyengar_choosing_what_to_choose.html

    Also, as a partial solution to the problem of ‘too many financial choices leading to paralysis’, Gail Vaz-Oxlade suggests opening a plain old saving account and putting money in there until a decision is made regarding where to invest. At least then you have started saving and are accruing a chunk of cash that wouldn’t exist otherwise, even if you are making diddlysquat in interest.

  10. I fricken love Costco for this very reason. I bet half my clothes are from Costco and it’s because I get so overwhelmed at clothing stores. At Costco if you want a shirt you can have this shirt or that shirt. I love it. Jeans… here you go. One pair. Perfect. I just want to buy some clothes and get on with life!

  11. I am in the same boat as you. I have a couple long term strategies, but I would love to get into something short term just to see how it all works. I’ve recently been looking into stocks, but my goodness there is soooooooo much information. It’s literally an information overload.

  12. Not sure if I’ve been overwhelmed with all the choices available. I have two on the table at the moment I’ve been struggling with: stay with current not-so-satisfying job and be retired in 20 years? or move to a new career that I could potentially work more than 20 years? I’m 35. Either is a feasible choice and I haven’t committed 100% to either.

  13. Yes! I totally know what you mean by the paradox of choice. I used to work with an older woman who had grown up in the Soviet Union and she used to say that the only thing she missed about the USSR was the limited number of products available in stores. She was totally overwhelmed by choosing a toothpaste and a pasta sauce and a shampoo from so many (she felt TOO many) options.

    I’m also trying to break into investing and I think I’m going to do it with Lending Club. It’s unconventional, but their returns are decent and the risk isn’t as extreme as the stock market. If all goes well there, I’m going to open a brokerage account with ING.

    BTW – it was great meeting you and Girl Ninja last weekend!

  14. I completely understand the paradox of choice and overwhelming anxiety that comes with making big financial decisions. My husband and I debated about just this thing forever, and then finally had to make the decision to just jump in. I was the more nervous one and I told him that I just needed to see how the market works for myself. After a few months of steadily investing I feel like I have a handle on the ins and outs, and we have begun to invest more per month, dollar cost averaging more effectively. My advice is to just jump in, and you can always change course along the way. You have enough financial security that you can have a little fun with it.

  15. I’m considering transitioning my emergency fund to I-savings bonds. The yield matches CPI-U cost of living index (this includes gas and housing for all of you concerned about this) and it has very high liquidity (1-30 yr term with a penalty of 3 months interest if withdrawn before 5 years) Also it is guaranteed to never lose value when there is a period of deflation. When you withdraw, you pay federal taxes on earnings, but no state taxes. It’s probably the safest investment available both on a yield basis & because it has very high liquidity. See https://www.treasurydirect.gov/indiv/products/prod_ibonds_glance.htm

  16. Lol, it’s true. I remember seeing a news show once that talked about some research done on choice. And how in today’s society we have SO MUCH more choice than we ever have in the past. In the past you get to pick between 3 channels, 4 pop choices, 3 ice cream flavors, etc. But now? Whoa. You don’t just make a choice, but there’s a choice within a choice. Which of these 253 types of phones do you want? Which of these 12 plan options do you want? WHich of these 820 phone protector design options do you want? You get the idea… the news show was saying how so much choice was supposed to make us happier because we could get exactly what we wanted…turns out though, people with more choices are less happy and more stressed out in their lives. Crazy, huh? So what you’re talking about here is real!

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