You arrive at work and turn on your computer. You take a minute to check your email before starting to write an urgent report … but then you discover 79 messages waiting in your inbox.
According to a study by research firm Basex, workers lose as much as 25% of their day to interruptions caused by unnecessary information, and so-called “information overload” costs the U.S. economy over $900 billion per year because of “lowered employee productivity and reduced innovation.”
Information is generally a good thing, but in today’s digital age, too much data can also be an impediment.
This impacts the way we invest, too. Like deer in headlights, many people have the tendency to become overwhelmed at the sheer volume of information thrown at them. When trying to invest, should you look up the expense ratio? Morningstar rating? Market capitalization? Should you thoroughly research all the geopolitical factors impacting your investment?
In response to the influx of info, many people freeze. This is an effect we'll call "do-nothing syndrome."
What This Means for Your Investments
After all the talk of the European debt crisis and the subsequent bailout last year (remember that?), a lot of us had the instinct to put a hold on investing in the stock market because the situation looked so complex, and so dire.
Making too many changes to your portfolio—especially if you change things all the time—isn’t wise. But neither is ignoring what’s going on because there’s too much going on.
Do-nothing syndrome can make us freeze in our tracks. This often takes the form of, say, simply going along with the default options on our retirement plans because making those decisions for ourselves feels daunting. Although this is better than not investing at all, letting ourselves become overwhelmed with decisions means we miss the chance to optimize and customize our choices.
In one study of do-nothing syndrome and investing, scientists experimented with the number and type of choices offered to investors. They proved that, when there are fewer options presented, people have an easier time making investing decisions.
The key is to strike the perfect balance between inaction and over-action: We need enough movement to make the best decisions ... without pressuring ourselves to research and do so much that it makes us freeze.
Here are several steps to make the most educated investment decisions you can, while keeping up your forward momentum. (By the way, some of the words, below, are underlined--mouse over them for more explanations!)
- Educate yourself. That same study about info overload found that individuals with a stronger understanding of investing basics are less likely to be affected. Reading up on sites like LearnVest not only makes you knowledgeable about personal finance, but it also protects you against feelings of “oh my gosh, there’s too much going on to absorb any of it!”
- Be selective about what you read. Do the research that’s necessary in order to make decisions responsibly (like looking up the expense ratioAn expense ratio is the fee a mutual fund pays for its own operating expenses. Ideally, your expense ratio should be as low as possible. Usually, under 1% is pretty good. Index funds almost always have lower expense ratios than actively-managed mutual funds. Here's more on mutual fund fees. of the mutual fund you like, or what sector of the economy it invests inFor example, a mutual fund might specialize in technology companies, or natural resources like oil. Other mutual funds focus on the size of certain companies--if a fund follows the S&P 500, it's tracking very large ("large cap") U.S. companies in that specific stock market index.), but set limits on your data intake. It’s not worth listening to everything that’s out there.
- Have your own periodic review. Schedule quarterly check-ups to look at your current investment decisions and reassess the possibilities. When you have this periodic check-in, ask yourself (1) whether your asset allocationThis is the mix of investments you choose for your portfolio, like putting a certain percent of your money in stocks versus bonds, or international stocks versus domestic ones. You should choose the asset allocation best for you based on your goals and time horizon--if you have more time, you can afford to be a little riskier, whereas you should be more conservative if you'll need the money back sooner. has drifted from your game plan and whether it's time to rebalance, (2) whether your life has changed in a way that would impact your finances, like getting married or having a baby and (3) whether your view of the economy has shifted in a long-term, meaningful wayIf you're a beginning investor, we don't think you should try to time the market or attempt to predict the future. We firmly believe that our readers should be investing for the long haul, which means choosing smart mutual funds--we like index funds because they have lower expenses--with the right mix of investments for you and your life stage.
- Pre-schedule your deposits: In addition to reassessing your investments quarterly, create a plan to make deposits into your investing account on a regular, automatic basis. Most banks and brokerages will allow you to set up automatic transfers, so you don't even have to think about it. This should help you overcome the natural human tendency to avoid action.
As the quantities of available information continue to mushroom, we all run the risk of becoming overwhelmed by data. So remember to keep things in perspective and strike the perfect balance between acting in your best interests ... and overreacting.
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