The Paradox of Choice: Why Robo Advisors Can Be Overwhelming for New Investors
Have you ever felt completely lost when trying to figure out where to put your savings? You're not alone! Many people find investing confusing and overwhelming, and Rob Advisors might not be making things any easier.
What Are Robo Advisors?
Robo Advisors are online investment platforms that use computer algorithms to manage your money. Despite their name, they don't actually provide personal financial advice. Most Robo Advisors expect you to already understand your own risk tolerance and investment goals. They typically show you a few pre-made investment options and leave you to choose between them - which can be very difficult if you don't understand investing basics. And some can have hundreds of products to choose from, making it almost impossible to know where to start even for experienced investors.
The Paradox of Choice: When More Options Make Things Worse
The concept of the "Paradox of Choice" comes from psychologist Barry Schwartz's 2004 book. Schwartz argued that while freedom of choice is positive, too many options can actually make us less happy and more stressed when making decisions.
Research shows that when faced with too many options, people tend to:
Put off making decisions altogether.
Feel more regret about the choices they do make.
Be less satisfied with their final decision.
Make poorer quality decisions.
A famous study found that when shoppers were offered 24 jam varieties to sample, only 3% made a purchase. .When offered just 6 varieties, 30% bought jam. .This research clearly demonstrated that sometimes less choice leads to better outcomes.
How Choice Overload Affects UK Investors
If you're new to investing in the UK, you might recognise these feelings:
Confusion when comparing dozens of different investment platforms.
Anxiety about choosing the "perfect" portfolio.
Fear of missing out on better investment opportunities.
Stress about whether to invest in property, stocks or bonds.
This overwhelming feeling isn't just unpleasant - it can prevent you from investing altogether, potentially costing you thousands in long-term growth.
A 2023 survey by the Financial Conduct Authority found that 37% of UK adults who wanted to invest. but hadn't yet started. cited "not knowing where to begin" as their main barrier.. This is the paradox of choice in action.
Understanding Risk When Using Robo Advisors
If you've never invested before, and sometimes even if you have, how are you supposed to know what your "risk profile" really means when a Robo Advisor asks you? It's like being asked to choose how spicy you want your food when you've never tried spicy food before!
Risk in investing is about how much your investment might go up or down in value. Higher risk investments might grow more over time, but they can also drop suddenly in value.
Some simple questions that might help you think about risk:
How would you feel if the money you invested dropped by 10% in a month?
Would you need this money within the next 5 years?
Could you sleep at night knowing your savings might temporarily drop in value?
Do you have emergency savings separate from your investments?
Many people with no investing experience don't realise that even "low risk" investments can lose money. And without experiencing the emotional impact of watching your investments drop in value, it's hard to truly know how you'll react.
Do Your Homework... But How?
You'll often hear that you need to "do your homework" before investing. The problem is that many people don't know where to start or what "homework" actually means in this context.
Most of us didn't learn about investing in school. Terms like "diversification," "asset allocation," and "compound interest" might sound like a foreign language if you're new to investing.
Are Robo Advisors Right for Everyone?
While Robo Advisors can make some aspects of investing more straightforward, they aren't perfect for everyone. The automated investment choices offered by Robo Advisors often lack the personalised guidance many people need. Some people might need a whole lot more guidance when facing investment choices, especially if they:
Have no idea what their risk tolerance really is.
Don't understand investment basics.
Have complicated financial situations.
Need help with other money matters beyond investing.
Why We're Building InvestCatapult
The overwhelming nature of investment choices presented by typical Robo Advisors is exactly why we're building InvestCatapult. We understand that too much choice can be paralysing, especially when it comes to something as important as your financial future.
Unlike traditional Robo Advisors that throw you in at the deep end, InvestCatapult is designed to guide you step-by-step on your investment journey.
We focus on:
Building your knowledge and confidence first.
Helping you truly understand your own risk tolerance.
Providing clear, jargon-free explanations.
Supporting you as you learn, to make informed decisions.
Creating a pathway to investment readiness, at your own pace.
Our goal isn't just to help you invest – it's to help you feel comfortable with investing, make better decisions and achieve better outcomes over the long term.
Final Thoughts
Investing doesn't have to be complicated, but it's important to have the right support along the way. Traditional Robo Advisors often expect you to navigate countless investment choices without proper guidance, leaving you to face the paradox of choice alone.
We invite you to join us at InvestCatapult, to start your journey to investment readiness today. Don't let the overwhelming number of options keep you from building your financial future. With the right tools, knowledge and support, you can overcome choice paralysis and begin growing your wealth with confidence.
The most important step is simply to begin your journey – and we're here to help you take that first step.