Good Decisions and Optimum Decisions

Let me tell you a familiar story, one that I’ve heard variations on many times from reader mailbag submissions and one that I witnessed a few times back in my office days.

Someone decides that they want to start contributing to their workplace retirement plan, which is a pretty good move for almost everyone. They go in to the HR office to sign up, only to find that there are a lot of options. That person doesn’t want to make a big mistake here, so they take the paperwork home to “look it over.” The idea of researching all of those options is intimidating, so they leave it on the desk and slowly forget about it.

Or, perhaps, they do start researching it and they find themselves facing all kinds of arcane advice. One article says they should strongly consider a Roth IRA instead. Another says that they should mix the two. Again, it seems overwhelming, so they just put the papers on the desk and slowly forget about it.

In both cases, the same problem is occurring: the good solution is lost in an effort to find the optimum solution. This is sometimes known as the “paradox of choice” – people are simply overwhelmed by options and fail to make a decision out of fear of not choosing the “best” one or not getting the most “bang for the buck” out of their choice. They lock up and often don’t make a choice at all or make a choice that’s based on something arbitrary.

I sometimes feel this myself. I’ll see “potato chips” on my grocery list, roll down the potato chips aisle, and I’m just gobsmacked at the options. There are 20 different brands of potato chips, each with 10 different flavors. Should I buy Sweet and Spicy Doritos? Sour Cream and Onion Lays? Harvest Vegetable Sun Chips? Store brand salt and vinegar chips? What about the “low fat” options? Which one is right? Which one is wrong? I stand there for 10 minutes trying to make the “optimum” decision when the “good” decision is pretty easy – just grab the one on sale that looks tasty.

That’s usually the best strategy: Quickly find a “good” option and go with it rather than investing a bunch of time to find the “optimum” choice. This route very rarely fails me.

So, let’s roll that idea back to the retirement savings scenario.

The “good” option in that scenario is simply putting money away for retirement in a tax-advantaged account with almost any investment option, and doing that starting today and contributing as much as you can. Simply doing that is going to blow away doing nothing at all.

The “optimum” option, of course, is simply evaluating every possible retirement option and account option available to you and picking an investment option based on some number of criteria that’s important to you. This route will likely get you into a somewhat better investment option than the “good” option, but it’s going to involve a significant time investment, time in which you’re not saving for the future.

So, what’s the best solution? The best solution is almost always to make the “good” choice now, then go back and redirect to the “optimum” choice later on.

Again, let’s take that through the examples I wrote about above.

With the retirement planning option, that means that the best overall move is to get down to the HR office right away and sign up for the retirement plan, socking away as much as possible. When you’re faced with retirement choices, choose one that seems to be in line with what you want and just go with it. Don’t overthink it – just make a quick choice that seems to match what you’re aiming for – and start contributing right away.

Remember, that’s the “good” move. The “good” move is simply socking money away for retirement as soon as possible.

Then, over the next few months, take some time here and there to look at all of those options. Look into what a Roth IRA is. Figure out how to compare the options available to you. Then, maybe it’s time to change your contribution options or open a Roth IRA on the side. However, that doesn’t undo the fact that while you were doing this, you were racking up money in a solid retirement option.

What about that potato chip option? I snag a bag that looks tasty, preferably one that’s on sale. I take it home and we have it with our picnic – it’s probably pretty good. If it isn’t, I know to avoid it going forward. If it is, then I know it’s a pretty safe choice and can easily grab it next time, particularly when it’s on sale.

Over time, I can move closer to the “optimum” chip decision. I try different kinds when they’re on sale and see what my family likes and doesn’t like, giving me more information to figure out what chips are best to buy for my family. Over time, I’ll know three or four choices that most of the family will really like, and the likelihood is that at least one will be on sale or will have a low store brand price. In other words, I make several “good” choices quickly and that leads me to being able to make the “optimum” choice down the road.

These ideas hold true for almost every money decision we make – in fact, it’s true for almost every decision we make. Whenever we’re faced with a choice with an abundance of options, we’re better off doing a little research and making a “good” choice than overanalyzing and chasing an “optimum” choice. Obviously, a bit of upfront homework is good for any decision, but this should quickly point you to a few trusted options and then you can make your decision based on that information.

So, here’s how I go about almost every financial decision, big or small, in my life.

First, I identify what the decision is. What exactly am I looking for? What is it that I need? Maybe I need to start saving for retirement in something fairly aggressive. Maybe I need a bag of chips that my family will like at a good price. I try to point to two or three specific features that I need in whatever it is that I’m doing. With the retirement savings, I need something fairly aggressive and something I can start as soon as possible. With the chips, I need something my family will like and something at a good price.

Second, I do a bit of research to find something that matches those two or three needs. For big purchases or for frequent purchases, I do the research using outside sources, usually starting with Consumer Reports. I see what they recommend and make sure that it matches my criteria. With investment options, I’ll look at something like Morningstar and check out the options available to me, just seeing what their Morningstar grade is and making sure it’s not anything bad (three stars and above, in other words). With things like chips, I mostly just think about what flavors my kids like; if I happen to notice a comparative potato chip review, I might look at it, but I’m generally looking for “flavors my family likes” and “inexpensive but not awful.” For single big decisions, I might do more up-front research, but with retirement savings, what I’m actually doing is buying a small investment with each paycheck, so it’s actually closer to the potato chip decision than one might think.

Third, I simply go for an option that’s clearly on top. With the investment, I just choose one that’s aggressive and has a decent Morningstar grade. With the chips, I just choose one that my family will like that’s on sale or is a store brand. That’s it.

After that, I might invest more time refining that “good” decision to an “optimum” one going forward. In my spare time, I might sit down and learn more about investing, but I can do it knowing I’m already in a “good” place and am just looking to improve it a little. If I decide to, I might open a Roth IRA or change my investment options at work. With the chips, I might notice an article about potato chips or think about what my family seemed to like the best and use that to refine my choice next time.

The goal here is to make the “good” decision quickly and simply refine it later based on the results of the “good” decision and on any further research I do on my own terms. That lets me take action in the present and actually move forward with things in my life rather than getting caught up in an endless decision making pattern.

Some good rules I use to guide myself to quick “good” decisions:
+ default toward store brand items and items on sale when they’re inexpensive things
+ trust the “best buy” option in Consumer Reports
+ trust investments that aren’t graded poorly by Morningstar (in other words, anything with three stars or above is okay by me)
+ consider my wife and children’s preferences

Those four rules usually narrow my choice down to one or two options really quickly for almost all financial choices, making it very easy to make a “good” choice that’s financially sensible without getting tied down in a big deliberation about what the “optimal” choice is.

Good luck!

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