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Choosing Less

Jonathan Clements  |  May 29, 2016

TOO MUCH CHOICE can be paralyzing. This is the reason many 401(k) plans have winnowed the list of funds they offer: Thanks to the smaller selection, participants are less likely to feel overwhelmed—and more likely to make an investment decision, rather than leaving their cash to languish in the plan’s money market fund.

I think this is a good strategy for other areas of our finances. For instance, you may make smarter investment decisions if you limit your choice by, say, deciding that you’ll never purchase individual stocks. You might also decide that you’ll stick with mutual funds from a single major fund company—think Fidelity, T. Rowe Price or Vanguard—or, alternatively, that you’ll purchase only index funds.

Similarly, you could narrow your room for maneuver by developing a written asset allocation, where you specify which market sectors you’ll invest in and what percentage of your portfolio you’ll allocate to each. You might earmark perhaps 30% for high-quality corporate bonds, 5% for real estate investment trusts, 5% for emerging stock markets and so on. That’ll still leave you with the decision of which investments to buy for each slot in your portfolio, but you’ll no longer be swimming in a pool of uncertainty that’s quite so large.

You might even use this strategy in other areas of your life, with a view to reducing uncertainty, saving time and perhaps also improving your own behavior. For instance, you might opt to do all your online shopping at Amazon, limit yourself to salads at lunchtime and only allow yourself to eat out twice a week.

I think such rules can be useful, but there is a downside. You may reduce uncertainty by narrowing your choice. But these self-enforced rules can also introduce a new element of uncertainty, because you could find yourself wrestling with whether to follow your own rules—or stray from the straight-and-narrow path you chose for yourself.

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