Chief among these stressors is information overload—there is a dizzying array of choices available for investment vehicles and sources of information from which to make investment decisions.
Too many jars of jam
The problem of choice overload is nothing new and is not unique to investments. Indeed, as far back as 2006, Harvard Business Review was chronicling this phenomenon in supermarkets, with a study in which psychologists asked shoppers to choose a jar of jam. Those who had six choices were 10 times more likely to actually buy one than those who were faced with 24 varieties.
Expand this out to investments and the field of options gets huge, with no fewer than 4,000 publicly traded stocks, 9,000 mutual funds, and 5,000 exchange-traded funds (ETFs) readily available. It’s easy to understand why the whole operation might turn off the average investor.
But fear not. As easy as it is to get caught up in investor paralysis, it’s just as easy to avoid it.
Make a plan (and stick to it)
Start with a basic question—why invest? What are your life goals that investments will help you achieve? A comfortable retirement? International travel? A college education for your kids? A new car every five years?
Whatever the answer, it’s important to articulate these goals, set a reasonable timeline for achieving them and craft an investment strategy that makes it all possible. This planning process gives you the tools to set up a strong portfolio and the confidence to ride out any market volatility that comes your way.
Diversify (and keep an eye on) your portfolio
Even the most rock-solid investment plan needs regular tweaks and tuneups. It can be tempting to stick with your current asset allocation, simply because it has worked well in the past. But as times change, so do the markets, and so must your approach to them.
Face your fears
Although workers in their 20s and 30s are doing their fair share of saving, they are not as excited about investing. Quite simply, many of them don’t trust the markets, due largely to the fallout from the 2008 financial crisis. Sixty-six percent are scared or intimidated by investments and choose instead to keep their money in bonds or money market funds, which are generally seen as more stable.
True, fluctuations in the market do occur, sometimes big ones, but the smart investor keeps these moves in perspective. Corrections of 5 percent or more happen about three times a year (and have since 1930), 10 percent about once a year and 15 percent every two years. Although these downward shifts can feel scary in the moment, a healthy perspective on the market’s past can bring peace of mind about its future.
Narrow your choices
Here is where a financial professional can come in handy. Someone who can sift through the myriad investment options and recommend a balanced portfolio that fits your specific needs. Planning for retirement? Step on the gas and go heavy on stocks. Need cash more quickly to replace a worn-out car or repair some damage to your home? Reel it in a bit with a more conservative mix.
It can be useful to narrow not only the list of investments you make, but also your sources of financial information. Once the domain of a select few, financial news is now wall-to-wall, with outlets that include legacy print media, online outlets, blogs, video channels and all manner of DIY options.
Again, an advisor can point you to the news sources that he or she reads religiously. It’s also worth noting that headlines, like market swings, come and go. Don’t base investment decisions on any single news item in the paper or push notification on your phone.
Think long-term
It can be tempting to get caught up in the minutiae of an individual stock’s performance in a given week, month or year. Investing, like football, is a game of inches. It takes perseverance and a willingness to stay on the field (and take a few hits) until you reach the end zone. Keep your eye on long-term trends and the natural fluctuations of the market won’t be nearly as overwhelming.