The Downside of Choice
Worry Consumes the Spirit of Action
Stock Market Video
In Case You Missed It
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There are well more than 10,000 investment vehicles in the marketplace today. These include individual stocks, U.S. treasury bonds, mutual funds, exchange-traded funds, options puts/calls, forex trades and so many more it’s enough to make you not want to invest at all.
In psychology, this falls under the concept of “choice paralysis.” This is the idea that when people are given a wide variety of choices, they are more likely to delay choosing out of fear of picking the “wrong” one. Whether it’s a diet pill, choosing a car, what investing choice to make or any number of other options, it doesn’t matter. The overabundance of choice means people are less likely to actually make a decision in the first place.
A study performed in the mid-1990s illustrated the point using jams. Columbia University professor Sheena Iyengar and Stanford University professor Mark Lepper set up a booth at Draeger’s Supermarket in Menlo Park on two separate days. The first day, they offered a selection of 24 jams. On the second day, they offered a selection of only six jams.
The results were fascinating. More people were attracted to the stand with 24 jams than the one with six options by a wide margin. However, only 3% of the people who tried jam at the 24-option stand purchased a jar. In contrast, 30% of the customers who tasted at the six-jam stand purchased a jar. An interesting note to this study is that people on average tried only one or two jams, despite the fact they were able to taste as many as they wanted.
You might be wondering how a study involving jam relates to investing. Let’s replace the jam jars with mutual funds you can choose as part of your employer-sponsored 401k. This fictional employer doesn’t offer target-date funds; instead, they offer you information packets on each of the more than 30 fund options that you’re able to select. The depth of information is overwhelming, and as you delve deeper into reading the prospectuses and historical performance it’s easy to get overwhelmed and not make a decision at all.
We understand choice paralysis at Cabot. The stock market is a scary place for beginners, and that’s why we created Cabot Stock of the Month. Designed for the investor who’s taking his or her first steps into the market, readers receive a recommendation to invest in one strong stock on the last Tuesday of every month with updates sent out every week between issues.
Cabot Stock of the Month pulls stock ideas from five specialized newsletters, each of which focuses on a different type of stock. As a result, you receive a wide array of stock choices that fall into one of five categories. These are momentum stocks, emerging markets stocks, growth stocks, energy stocks and value stocks. The important part, however, is that you’re only given one stock every month. That’s it--one strong stock chosen from five of our premium publications; all with the express aim to give beginning investors a diversified portfolio.
You’ll get a good education in investing from reading Cabot Stock of the Month as well. Each issue begins with an update on the condition of the stock market before you’re introduced to the stock pick for the month. Perhaps the best part about the newsletter is the detailed explanation of why each stock is chosen. We offer two pages worth of well-written logical reasoning for picking a particular stock.
This is all targeted toward you the beginning investor, and designed to avoid the choice paralysis that comes from a newsletter with multiple recommendations. The best part is that as you get more comfortable with investing, you can always upgrade to one of our premium newsletters instead. If you’re interested in getting started on investing, I encourage you to click here.
Limiting your options is only one way to avoid choice paralysis. Fewer choices then means you don’t worry as much about making the wrong one. More options might seem like a good idea, but not if it creates worry that you’re choosing the wrong option. That’s where the real problem comes in. People don’t choose, or take a really long time to choose, because they’re worried they’ll regret the choice later.
So how do you avoid choice paralysis when it comes to investing? One of the key things to remember is that no investment move is forever. If you purchase stock in International Business Machines (IBM), not a single person will say you have to hold onto that stock for the rest of your life. You could sell the stock the very next day if you regretted the move; you might get a net loss or a net gain, but the key thing is you made a choice.
This is in contrast to the person who reads the financial news every day, watching the market go up and down like a seesaw and refuses to invest any money for fear of making the wrong choice. I’m not going to pretend losing money is a good thing--unless you’re short selling, which is a very risky practice--but making a decision and committing to investing is better than sitting on the sidelines waiting for “the perfect moment” to start.
The French philosopher Voltaire once said, “The perfect is the enemy of good.” So what can you do to avoid always questing for the perfect? Learn to recognize good decisions, remember that no investing move is forever and don’t sacrifice the good in pursuit of the great.
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Here’s this week’s Contrary Opinion Button. Remember, you can always view all of the buttons by clicking here.
Worry Consumes The Spirit Of Action
Attributed to Hazrat Inayat Khan, who founded the London-based “Sufi Order of the West” in 1914, this quote reminds us that actions should be carried out with a pure conviction, and that worry clouds one’s spirit, and by extension, perhaps, one’s thinking.
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In this week’s Stock Market Video, Cabot Market Letter and Cabot Top Ten Trader Editor Mike Cintolo discusses the firm uptrend in the market despite some selling pressures that began to emerge. Mike suggests holding some of your positions, but says it’s fine to take some profit as well on your winners. Featured stocks: Buffalo Wild Wings (BWLD), W.R. Grace (GRA), J.C. Penney (JCP) and Delta Air Lines (DAL). Click below to watch the video!
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In case you didn’t get a chance to read all the issues of Cabot Wealth Advisory this week and want to catch up on any investing and stock tips you might have missed, there are links below to each issue.
Cabot Wealth Advisory 2/13/12 - An Unusual Vacation
On Monday, Cabot Publisher Timothy Lutts discussed his late January vacation to Madeira and the Azores. Tim also wrote about the memorable experiences of hearing a Catholic Mass on Saint Timothy’s Day and visiting the Furnas hot springs sans the crowds. Featured stocks: TripAdvisor (TRIP) andLinkedIn (LNKD).
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Cabot Wealth Advisory 2/16/12 - Be Willing to Take Some Heat
On Thursday, Cabot Market Letter and Cabot Top Ten Trader Editor Michael Cintolo discussed how important it is to have some risk tolerance when investing. Mike also wrote about placing stops and working the rebound in the housing market. Featured stock: Eagle Materials (EXP).
Happy investing,
Matthew Delman
Editor of Cabot Wealth Advisory
Editor’s Note: The stock market is a scary place for the inexperienced. Let us guide you with our newsletter specifically designed for beginners. We’ll give you one strong stock, once per month, chosen from five of our premium newsletters. Follow our recommendations, and you’ll be a savvy investor sooner than you think. Click here to learn more.