by Tyler Curtis
In the modern digital era we have access to up to the minute information 24 hours a day, seven days a week. Everything from stock quotes, news reports, sports scores, to weather half way around the world can be accessed in a matter of seconds from your smart phone. Information is a great tool, but in today’s digital era, too much data can also be impeding.
According to a study from the research firm Basex, American workers lose as much as 25% of their day to interruptions caused by unnecessary information, and this “information overload” costs the U.S. economy over $900 billion per year due to “lowered employee productivity and reduced innovation”.
All of this information impacts the way we invest too. Like a deer in headlights many investors are petrified when trying to make investment decisions. Should I look at the expense ratio? Morningstar rating? What affect will Europe or the price of gold have? What about the upcoming election? The natural response to all of this information is to freeze; this is often referred to as “Analysis Paralysis”.
After all of the talk of the European debt crisis and subsequent bailout last year, a lot of investors put a hold on investing or got out of the stock market all together because the situation looked so complex and dire. Even today you will still find daily headlines detailing the concerns over the situation in Europe. However if you have succumbed to this massive influx of information and froze your investments you would have missed out on the 23% rally that the S&P has had over the last 12 months.
Analysis paralysis can make us freeze in our tracks. This can affect your investments in lots of ways, often when signing up for retirement plans investors opt for the default options because making those decisions for themselves feels so daunting. Although better than not investing at all, becoming overwhelmed with decisions means missing out on the opportunity to optimize and customize your choices.
In one study on investment choices, surveyors experimented with the number and types of choices offered to investors. They found that when there are fewer options presented people have a much easier time making investment 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. The best way to accomplish this is to adopt a well written defined investment strategy that does not allow for over analyzing or irrational decision making.
There are several other ways to help prevent yourself from over analyzing your investments. Educate yourself, the same study about information overload also found that individuals with a stronger understanding of investment basics are less likely to be affected. Read up on investing basics and browse our free library of reading material to help further your understanding of investing. Pre-schedule your deposits. Create a plan to make deposits into your investing account on a regular, automatic basis. Setting up an automatic deposit will help avoid the natural tendency to avoid action during volatile times in the market.