Have you ever sat down at a restaurant and been overwhelmed by the number of menu options? While choosing a meal is a fairly low-risk decision, making a choice when there are too many selections can be daunting. A similar feeling of decision paralysis can apply to new investors that aren’t sure how to choose their first investment. According to this article from Forbes, there were over 10,000 different mutual funds and ETFs available to investors in the middle of 2018. While having this large number of choices has created a competitive market and driven down investing costs significantly, it has, at the same time, increased the level of difficulty for novice investors to research and choose what to invest in. If you’re new to investing, check out these 5 tips to get past the investment decision paralysis.
1. Start with your end goal and risk tolerance. Think about how long you’ll be investing. Is this money for retirement in 30 years, or are you going to use it to buy a house in 5 years? Then consider your ability to tolerate fluctuations in the value of your investments. Those with longer time horizons and the discipline to watch their account values move up and down frequently are likely to have a higher risk tolerance. For those with a shorter-term goal or an inability to sleep at night thinking about what will happen if their investments lose value are likely to have a lower risk tolerance.
2. Look for a mutual fund or ETF that diversifies for you. Global diversification of your investment dollars is important. No one (not even the experts) knows which asset class will outperform from one year to another. If you’re diversified, it’s likely you’ll benefit from whatever part of the market is doing best. There are hundreds of professionally managed mutual funds and ETFs that employ a global diversification investment philosophy and can help keep your portfolio diversified using the fund’s investment allocation.
3. Keep it simple. Try to start with just one mutual fund or ETF that fits your goals and risk tolerance. Holding more than one investment, especially when you aren’t investing a large dollar amount, can result in over-diversification and overall investor confusion.
4. Watch your investing costs. Take a look at things like the operating expense ratio, load charges, commissions and transaction fees. If you’re investing in a mutual fund or ETF, there is an ongoing (behind the scenes) expense ratio that helps keep the fund running. Try to aim for a fund charging 0.70% or less, which is close to the average cost for a balanced mutual fund. Load charges are a sales charge you pay to someone who’s selling you a fund. Attempt to avoid these because they’ll decrease your total return on investment. Investing in ETFs can result in a commission paid to your brokerage firm. Look for a firm with low commissions. Some mutual funds will require a transaction fee to be purchased or sold through a brokerage firm. This usually leads to a lower ongoing expense ratio and can sometimes be worth paying.
5. Use your available free resources. If you already have a brokerage account with a place like Fidelity, Vanguard, or Charles Schwab, use their free research tools available online. If you haven’t opened an account yet, another great place for research is the Morningstar website.
Investing doesn’t have to be intimidating. If you’re not comfortable making your own investment decisions or feel like there are just too many choices, asking for help is always a great option. An experienced, licensed investment advisor can help you narrow down your choices or even make a specific recommendation for an investment. Just make sure you know how this advisor is paid for their services. As always, working with a fee-only Certified Financial Planner™ professional (like one of us) is a great place to start.