PWL Capital March 15, 2017 Personal Wealth Starting Out Applying the Pareto Principle to Investing Analysis paralysis occurs when you over-analyze a situation with many options that no decision or action is taken. This was summed up nicely by a famous study on jam. Psychologists Sheena Iyengar and Mark Lepper conducted a study where they displayed an array of jams to sample. If you sampled a jam, you got a coupon that could be used on any of the jams. Another day, they significantly reduced the number of sampled jams on display. The large display attracted more interest than the small one, however those who saw the large display were only 1/10th as likely to buy jam as those who saw the small display. In investing, it is much the same. Too many options and solutions can lead to decision analysis, which can often be worse than making a suboptimal decision. If you’re waiting for the perfect solution, then you might miss out on positive investments returns you could have still gotten from that suboptimal solution. The Pareto Principle states that 20% of the effort exerted creates 80% of the results. So why not focus on that 20%? Two things that investors have direct control over are the fees they pay for their investments and their savings rate. For this video, I answer the question “If you only changed one thing, either your savings rate or the investment fees you pay, which option will make you richer?” I’ve also included a calculator that can help you decide which option to focus on, given your own situation. Doing both will ultimately lead you to a higher net worth (all other things being equal), but focusing on the one that will make the biggest impact first, then making other tweaks might be the best solution if it results in immediate action. If there are any decisions you’re looking to make, but aren’t sure which is better, let me know in the comments below. Share: Facebook Twitter LinkedIn Email