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The Consequences of Product Proliferation

Access and choice are not always a good thing. Investing has become too complex and overwhelming, with a myriad of choices and the endless stream of information that accompanies them. This is further compounded by the ease with which investments can be bought and sold. Confronted with this, many investors become paralyzed or impulsively buy and sell, in an elusive attempt to keep up.

NUMBER OF MUTUAL FUNDS AND ETFS VS. US-LISTED STOCKS (Year-end 1980 – 2016)

StocksVsProducts

Source: The World Bank Group, Investment Company Institute. | Notes: ∆ Mutual Fund totals do not include funds which invest primarily in shares of other mutual funds. Mutual fund totals represent unique funds and do not count different share classes of the same fund. ETF totals include non-40 Act investment companies such as ETNs.

In 1980 there were 5,164 stocks and 564 mutual funds. As of 2016 the number of stocks declined to 4,331 while the number of funds and ETFs exploded to 9,782, including 8,066 mutual funds and 1,716 ETFs.  It’s no wonder investors and advisors are overwhelmed.

Product proliferation has gone well beyond the marginal benefit of a few more choices and some specialization that might benefit consumers. As a result, the answer to basic questions such as “what mutual fund or index should I buy?” has become a quagmire. The situation is made worse by mountains of data and armies of analysts offering even more information and research on every possible investment.   

This product overload ultimately creates confusion and anxiety for advisors and investors as they try to navigate the sea of choices and make sense of things. This is where a deep breath and a healthy dose of common sense can be quite useful. It’s important to recognize that there is no silver-bullet investment that everyone must have, and to realize you don’t need every investment that comes down the pike to succeed. In most cases, a handful of thoughtfully selected investments can meet most investors’ needs.

From the Behavioral Viewpoint

What is going on?

  1. Information bias, we think that more information will lead us to better decisions. In fact, more information is not always better. The industry provides massive amounts of information on the latest products and why you should buy them. This creates an availability bias that we should buy new products, rather than the ones we have.
  2. We often stereotype, which allows us to more quickly assess a situation and make decisions without real information. Active management can (can’t) outperform, value is better (worse) than growth, etc. Clustering illusion, our tendency to see patterns in random events, can also play a role. In this case we may see a pattern, often presented by marketers or the media, that supports a notion about certain investments that we act upon.
  3. When we choose something, we tend to feel better, even if the choice has flaws in it. This is known as choice supportive bias. We somehow feel better if we do something, anything, with our investments. 

What can we do?

  1. Develop a comprehensive financial plan that identifies specific needs and goals. Use a reasonable set of investments to satisfy those needs. Give them sufficient time to perform and measure progress towards goals.
  2. Follow a disciplined portfolio management approach to avoid product and performance chasing. Select complimentary strategies that do well in different environments and understand their underlying investment process to more effectively monitor and evaluate them.
  3. Work with a professional financial advisor who can provide valuable expertise, education and behavioral coaching.

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IMPORTANT INFORMATION AND DISCLOSURES

The information provided here is for general informational purposes only and should not be considered an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. It should not be assumed that recommendations of AthenaInvest made herein or in the future will be profitable or will equal the past performance records of any AthenaInvest investment strategy or product. There can be no assurance that future recommendations will achieve comparable results. The author’s opinions may change, without notice, in reaction to shifting economic, market, business, and other conditions. AthenaInvest disclaims any responsibility to update such views. These views may not be relied upon as investment advice or as an indication of trading intent on behalf of AthenaInvest.

You are solely responsible for determining whether any investment, investment strategy, security or related transaction is appropriate for you based on your personal investment objectives and financial circumstances. You should consult with a qualified financial adviser, legal or tax professional regarding your specific situation. Investments involve risk and unless otherwise stated, are not guaranteed.  Past Performance is no guarantee of future results.

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