How to invest when there is too much choice

A very good friend of mine, millennial and loyal reader, delivered a particularly harsh reality at the weekend: she couldn’t find the answer she was looking for on FundCalibre! I immediately felt like I had failed. Her issue? “For a first-time investor, 200 funds is still too many.” And she’s right. She’s looking for one or two funds – her first ever investments – for an unexpected inheritance. She’s answered all the traditional questions like ‘what are your goals?’ and ‘what’s your time horizon?’ – she also understands her level of risk. The final step is heading to the list of Elite Rated funds and starting her research, to effectively select 1% of the fund research available to her. Easier said than done.

“May your choices reflect your hopes, not your fears.” — Nelson Mandela

The paradox of choice refers to the difficulty of making a decision when presented with many options – especially when all the options seem to have equal value. More choice is not always a good thing. In fact, it can decrease our motivation to make a decision at all, decrease our satisfaction with the choice we finally make, and increase negative emotions, like regret.

FundCalibre, at its core, answers the paradox of choice for many investors. We look at more than 3,000 fund options and narrow them down to a list of around 200. However, if it’s your first ever investment, even a list of 200 can be very daunting – especially when combined with the word research. You suddenly feel as though you’ll be wasting days or even weeks of your life – so what’s the point?

One of the best ways to combat this paradox of choice and reduce anxiety is to eliminate some of the options available.

3 questions to ask yourself before investing

  1. What are your savings goals?
  2. What is your time horizon?
  3. How much risk are you comfortable with?

Researching funds by working backwards

If you already know your investment goals, time horizon and level of risk then you have a good understanding of what you’re not interested in. For example, if you are young and saving for retirement, do you need bonds in your portfolio? No? Then don’t look at those funds. There is such a thing as too much information.

Need a refresher on asset classes and their level of risk? Review our two minute guide here.

Are you curious about investment trusts? Yes? Great. Take time to read more about how they work. If you feel comfortable with the information, then start looking at individual options. You’ve already cut your list to 10%. Don’t invest in anything you don’t understand.

Once you have a clear idea of which asset classes and regions you’re interested in, focus on each one at a time. There’s no point comparing a ‘go anywhere’ global fund to a UK smaller companies fund. Those research notes, and risk profiles, will be very different.

What information is important on a research note?

Each Elite Rated fund or trust (and those on our Radar) have a fund note. On each note you will find information that can help you decide if this fund is for you. Of course, all the information is relevant, but that doesn’t mean it’s important to you. If I presented two investors with the same research note and asked each to list the three most important pieces of information, I guarantee that those lists would differ. For some, cost is the most important thing. Others will be more concerned with the fund manager’s experience – or even the top holdings.

Reviewing the opinion section for each note is an important step too, as it tells you exactly why we have chosen the fund and believe it qualifies as an Elite product. Then, of course, there’s the process the fund uses to make investment decisions and the risk score. Every fund and trust rated by FundCalibre includes a risk score from 1 to 10 (10 being the highest risk) to help guide you. This doesn’t mean the manager is a gambler, it simply means the asset class in which the fund sits is riskier.

Letting the experts choose funds for you

All just a bit much for you still? Consider a multi-asset fund to take some of the stress away. Multi-asset funds are a ‘one-stop shop’ as they invest in a number of different assets and a manager changes this allocation around depending on what is happening in markets.

There are less than 20 multi-asset funds with an. Elite Rating, so it’s already a more manageable short-list.

Premier Miton Multi-Asset Monthly Income, is a ‘fund of funds’ and invests in a number of other Elite Rated products, for example TB Evenlode Income, GAM UK Equity Income, Montanaro UK Income and Man GLG Income*.

TB Wise Multi-Asset Growth sits in the ‘flexible’ sector and can invest up to 100% in equities. The fund generally contains between 30 to 60 individual funds and, as a multi-asset fund, the managers will balance diversification and risk, so you don’t have to.

Multi-asset funds can also invest directly in individual stocks and bonds, such as M&G Episode Income. The manager of this fund uses behavioural economics to find pockets of opportunity, which is particularly pertinent at the moment when investor behaviour has been so important.

*Source: fund factsheet, 30 June 2021

This article is provided for information only. The views of the author and any people quoted are their own and do not constitute financial advice. The content is not intended to be a personal recommendation to buy or sell any fund or trust, or to adopt a particular investment strategy. However, the knowledge that professional analysts have analysed a fund or trust in depth before assigning them a rating can be a valuable additional filter for anyone looking to make their own decisions. Past performance is not a reliable guide to future returns. Market and exchange-rate movements may cause the value of investments to go down as well as up. Yields will fluctuate and so income from investments is variable and not guaranteed. You may not get back the amount originally invested. Tax treatment depends of your individual circumstances and may be subject to change in the future. If you are unsure about the suitability of any investment you should seek professional advice. Whilst FundCalibre provides product information, guidance and fund research we cannot know which of these products or funds, if any, are suitable for your particular circumstances and must leave that judgement to you. Before you make any investment decision, make sure you’re comfortable and fully understand the risks. Further information can be found on Elite Rated funds by simply clicking on the name highlighted in the article.