The Paradox of Choice…Can Having Too Many ETFs Make You Unhappy?

November 20, 2010

Social scientist Barry Schwartz makes the case in his book "Paradox of Choice – Can Having Too Many Choices Make You Unhappy" that unlimited choices produces genuine suffering.  The more choices we have to make, the less certainty we seem to have. Let's apply this to investing.

Today, there are over 1,000 Exchange Traded Funds (ETFs), representing one of the fastest growing segments of the investment industry.  ETFs first became popular back in the early 1990s with the introduction of  "SPY", or Standard & Poor's Depository Receipts.  Also known as SPDR or Spider, this ETF has gone on to become the largest in the world. Initially designed to provide a fast and affordable way to mimic popular stock market indices and sectors, today ETFs have proliferated to represent an array of regions, sectors, commodities, futures, and other asset classes.  

So, according to Schwartz, when faced with seemingly unlimited choices that have significant consequences, such as investing, people will relentlessly search for the best option.  These people spend a great deal of time and energy on choices that will never satisfy them.  Which brings me to the main point of this post and to why I created PortfolioCafe.

Relative Strength investing and mechanical stock screening approaches have the ability to quickly and easily cut through the many choices presented to investors.  With Relative Strength we can quickly and easily reduce the universe of ETFs to only those that matter at this moment.  The best performing investment opportunities naturally present themselves to us.  With mechanical, multi-factor models, investors can screen through thousands of stocks and find the small handful that meet a given criteria.  By following such approaches, investors can reduce their choices and apply their limited time and energy in a meaningful way.

I am not against choice or the many new ETFs which have been constructed.  Quite to the contrary, I think investors have never had it so good.  For much of my career as a broker, the only way to hedge a portfolio against downside risk was buy purchasing put options or shorting stocks.  Today, investors can easily hedge a portfolio or actually profit from market declines through inverse ETFs.  Also, it has never been so easy to build a well diversified portfolio with exposure to a variety of asset classes.  So choice is good.

What I think is missing for many investors is the means to filter the many choices.  Too much information and too many choices causes paralysis. Investors are constantly bombarded with "tips" and "market news" which in reality is nothing more than "noise".   

PortfolioCafe was designed around systematic and mechanical approaches to investing which reduce the time and energy spent on decision making.  The systems and models presented within this site are well grounded upon research and historical evidence.  The "Paradox of Choice" has been greatly reduced to a handful of well thought out and carefully researched systematic approaches to investing. 

In my next post, I will discuss "The Art of Becoming an Investor Minimalist".


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