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3 ways to overcome investment analysis paralysis

Posted by William Hull November 22, 2019 • 4 min read

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  • The basics of what analysis paralysis is
  • Why hesitation is so common (and dangerous) to investors
  • 3 tips to help you overcome analysis paralysis
A woman overwhelmed by data and choices

Imagine two restaurant menus. The first menu has three entrees, one soup or salad and two options for dessert, all printed on one folding card. The other is a book with eight categories of cuisine, each offering twelve different entrée options and featuring a matrix of sauces and optional fixings, plus a three-page dossier of desserts.

Which would you rather order from?

While we may think that more choice is a good thing, it’s well-documented that too many options tends to cause confusion, frustration, and even anxiety that ends in an inability to make any decision at all.

Now if the TSX was a restaurant, it would have over 1,500 options. Each of these options has its own dossier of corporate reports, and often a stack of newspapers full of third-party analysis and speculation as well. And this is the small menu—the NYSE and NASDAQ have nearly 6,000 choices between them, each with their own volumes reports and speculation.

If you’re starting to feel overwhelmed, that’s something called analysis paralysis, and we’re going to show you how to get past it.

What is analysis paralysis?

Analysis paralysis refers to when you’re presented with so many choices that you end up making no choice at all. It’s not a new concept: Aesop has a 2,000-year-old fable about a fox who is caught while deciding between his hundred clever tricks to get away, while his cat friend takes its only route to safety.

Perhaps the most dangerous part of analysis paralysis is that it’s made of legitimate and healthy desires and concerns. You always want to make the best, most informed decision possible, and no one wants to make a choice that produces a negative outcome.

How analysis paralysis can sabotage investors

The stock market is probably one of the most frequent sources of analysis paralysis. After all, where else do you have to pick a handful of choices from more than 7,500 available options?

Analysis paralysis is pervasive among investors:

  • It can make you feel personally responsible when a stock under-performs.
  • It can make you feel terrible about every other stock that performs well.
  • It can keep you from investing at all.
  • Fear of paralysis can prompt one to make rash decisions.

How to identify & overcome analysis paralysis (without over-correcting)

Identifying and addressing “analysis paralysis” can be tricky. Much of it boils down to identifying your own personal tendencies. When does over-thinking cause you to hesitate? How much data can you digest before you start to overload? When does your excitement drive you to make rash decisions? Once you’ve understood your tendencies, you can adjust your investing strategy accordingly.

Everyone’s solution is different, but there are a couple of helpful tips that can help you make those research decisions a bit more manageable.

  1. When in doubt, “Simplify, simplify.”

    Even seasoned investors can find the amount of market data, news, and editorial opinions to be overwhelming. As you become more familiar with investing, you can gradually figure out which data points work best for your strategy. You can also identify information that isn’t relevant to your current decision, such as data that doesn’t favour any option over the others. You can also simplify the decision by ruling out the weaker choices once they are identified.

    Like writer and essayist Henry David Thoreau famously said, "Our life is frittered away by detail. Simplify, simplify."

    Instead of seeking out more data, buckle down and prune the data you have. After all, if you’re feeling overwhelmed, more data is just about the last thing you need. Narrow down your variables and choices until the answer becomes clear.

    Finally, if you can’t decide on a single stock, you can always look into finding an ETF that covers the entire sector or market.

  2. Soften the question with “Fuzzy Logic”

    Fuzzy Logic measures an outcome in terms of degrees rather than absolutes. That means looking at things on a sliding scale, instead of seeing them as math questions with a right and wrong answer. This is usually accomplished by re-framing the question for a softer answer.

    For example, say you’re looking at stocks in the retail sector. If you’re going above and beyond due diligence to consider absolutely all available data, you’ll find yourself juggling information on past performance, seasonal growth trends, dividends, earnings projections, reading press releases about upcoming product launches, speculation from your favorite news sites or investment blogs, the growth and market share of their competitors, and trying to calculate which of your prospects will mathematically provide the best return.

    That’s a whole lot of data to take in and process, especially if you’re trying to weigh each piece of data against the others.

    To escape analysis paralysis, you might read all of that data, take a step back, and say, “Okay, these are all good options. Which one do I think best suits my investment strategy?”

    With the ‘fuzzy approach’, the question still takes all that data into account, but it’s looking for a ‘fuzzy’ answer. You aren’t asking yourself to solve for X; you’re asking the more subjective (and much easier) question of which of these perfectly valid options looks like the best investment.

  3. Outsource the stress
    Finally, there are plenty of resources that you can consult for a little extra direction. Reading how an experienced investor addresses your question may help you to inform your own decisions.

    Of course, you should always take third-party opinions with a grain of salt, and be careful about blindly following any source’s advice, particularly if they have a vested interest in a stock’s performance. Listening to analysts, experts, and more experienced traders can give you a better understanding of how they deal with information, so that you can make more informed and efficient choices for yourself. Just be sure to remember that, at the end of the day, it’s your choice to make.

Find the method that's right for you

Analysis paralysis is a very common problem in the investing world—but it’s a problem with a wide variety of solutions. Ultimately, you just have to find the method that works best for your own thought process.

Once you’ve figured out how to parse out and deal with the information, you can start investing with confidence—even if you don’t know every little thing.

 

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The information in this blog is for information purposes only and should not be used or construed as financial or investment advice by any individual. Information obtained from third parties is believed to be reliable, but no representations or warranty, expressed or implied is made by Questrade, Inc., its affiliates or any other person to its accuracy.