Decision Paralysis. What is it and how to avoid it?

Mind Over Money key principles
Peter Siks

Summary:  When there are too many options, sometimes it’s easy to just not do anything, which may lead to losses that it can be hard to recover from.


A constant worry of not timing the market can prevent uneasy investors from reaching their financial goals. Delaying action because of the relentless fear of getting in when the market is too high or selling when the market is too low is what we call decision paralysis. 

Decision paralysis is a very common behavioral finance concept. This is what happens to some investors when there are too many choices or too many unanswered questions, and they freeze up and miss out on opportunities.  

Trying to time the markets is always an impossible strategy, so here are a few tips to help you reduce risk when market fluctuation is keeping you from investing. 

Tip 1: Sell some, but not all

The simplest way to reduce risk during market volatility is to 'sit down in cash'. Selling part of your investments, but not all of them, can be an easy button to turn. However, if you sell those assets when the markets are down, you won’t reap the rewards when the markets go back up. 

Tip 2: Invest more defensively

Another way to reduce the risk of a portfolio is to opt for more defensive sectors. Don’t choose cyclical sectors – travel industry, automotive and broadcasters, for example – but rather favor less cyclical sectors such as food, utilities and healthcare. 

Tip 3: Spread your shares more

Another way to reduce risk is to diversify your shares. Don’t choose two or three individual titles in one sector. Invest in multiple asset classes such as bonds and/or commodities. A globally diversified bond ETF can still have a positive return when markets drop. With commodities you can opt for a broadly composed index that includes metals and energy, as well as soft commodities such as grain and coffee.

Tip 4: Work with stop loss orders

For the actively managed part of the portfolio, it can be wise to work with stop loss orders. It prevents that 'bleeder' that causes the total return of the portfolio to be cancelled out by one or two wrong choices. And if you opt for the trailing stop loss order, you know that it 'follows' the rise in the share at a fixed distance.  

Don't think black and white

Making choices now about a future that is uncertain is, and remains, very difficult.  Try to remind yourself that you're never going to do it perfectly. If you now 'go full cash' and the stock market continues to rise 10%, then you are disappointed. If you remain fully invested and the stock market falls by 10%, then you are also disappointed. Furthermore, you will never sell at the top and be a buyer at the bottom. So don't expect that from yourself either.

Finally, it can help to not think too much in black and white terms. If you are now fully invested and you suffer from a fear of timing the market perfectly during volatility, you can of course go partially cash. If the market rises further, you are still in the market with the rest of your portfolio, and in case of a decline, the loss is less than with the full position. 

Conclusion

Decision paralysis happens to the best of us during different situations and life events. What matters is recognizing this conflict in yourself when it happens, and making sure you have a plan of action in place to reference when market volatility makes you uneasy. It is perfectly reasonable to stop and carefully consider what you want to do. Just remember  that there are plenty of ways to protect your portfolio as a whole, or individual stocks, from a potential decline.

So, look at your portfolio and give it careful consideration. Especially if you feel that the stock market is (too?) high at the moment. Not intervening is a choice, but let it be a conscious choice. 

 

Quarterly Outlook

01 /

  • Macro Outlook: The US rate cut cycle has begun

    Quarterly Outlook

    Macro Outlook: The US rate cut cycle has begun

    Peter Garnry

    Chief Investment Strategist

    The Fed started the US rate cut cycle in Q3 and in this macro outlook we will explore how the rate c...
  • Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Quarterly Outlook

    Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Althea Spinozzi

    Head of Fixed Income Strategy

  • Equity Outlook: Will lower rates lift all boats in equities?

    Quarterly Outlook

    Equity Outlook: Will lower rates lift all boats in equities?

    Peter Garnry

    Chief Investment Strategist

    After a period of historically high equity index concentration driven by the 'Magnificent Seven' sto...
  • FX Outlook: USD in limbo amid political and policy jitters

    Quarterly Outlook

    FX Outlook: USD in limbo amid political and policy jitters

    Charu Chanana

    Chief Investment Strategist

    As we enter the final quarter of 2024, currency markets are set for heightened turbulence due to US ...
  • Commodity Outlook: Gold and silver continue to shine bright

    Quarterly Outlook

    Commodity Outlook: Gold and silver continue to shine bright

    Ole Hansen

    Head of Commodity Strategy

  • FX: Risk-on currencies to surge against havens

    Quarterly Outlook

    FX: Risk-on currencies to surge against havens

    Charu Chanana

    Chief Investment Strategist

    Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperfo...
  • Equities: Are we blowing bubbles again

    Quarterly Outlook

    Equities: Are we blowing bubbles again

    Peter Garnry

    Chief Investment Strategist

    Explore key trends and opportunities in European equities and electrification theme as market dynami...
  • Macro: Sandcastle economics

    Quarterly Outlook

    Macro: Sandcastle economics

    Peter Garnry

    Chief Investment Strategist

    Explore the "two-lane economy," European equities, energy commodities, and the impact of US fiscal p...
  • Bonds: What to do until inflation stabilises

    Quarterly Outlook

    Bonds: What to do until inflation stabilises

    Althea Spinozzi

    Head of Fixed Income Strategy

    Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain ...
  • Commodities: Energy and grains in focus as metals pause

    Quarterly Outlook

    Commodities: Energy and grains in focus as metals pause

    Ole Hansen

    Head of Commodity Strategy

    Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities i...

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
Full disclaimer (https://www.home.saxo/legal/disclaimer/saxo-disclaimer)
Full disclaimer (https://www.home.saxo/legal/saxoselect-disclaimer/disclaimer)

Saxo Bank (Schweiz) AG
The Circle 38
CH-8058
Zürich-Flughafen
Switzerland

Contact Saxo

Select region

Switzerland
Switzerland

All trading carries risk. Losses can exceed deposits on margin products. You should consider whether you understand how our products work and whether you can afford to take the high risk of losing your money. To help you understand the risks involved we have put together a general Risk Warning series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. The KIDs can be accessed within the trading platform. Please note that the full prospectus can be obtained free of charge from Saxo Bank (Switzerland) Ltd. or the issuer.

This website can be accessed worldwide however the information on the website is related to Saxo Bank (Switzerland) Ltd. All clients will directly engage with Saxo Bank (Switzerland) Ltd. and all client agreements will be entered into with Saxo Bank (Switzerland) Ltd. and thus governed by Swiss Law. 

The content of this website represents marketing material and has not been notified or submitted to any supervisory authority.

If you contact Saxo Bank (Switzerland) Ltd. or visit this website, you acknowledge and agree that any data that you transmit to Saxo Bank (Switzerland) Ltd., either through this website, by telephone or by any other means of communication (e.g. e-mail), may be collected or recorded and transferred to other Saxo Bank Group companies or third parties in Switzerland or abroad and may be stored or otherwise processed by them or Saxo Bank (Switzerland) Ltd. You release Saxo Bank (Switzerland) Ltd. from its obligations under Swiss banking and securities dealer secrecies and, to the extent permitted by law, data protection laws as well as other laws and obligations to protect privacy. Saxo Bank (Switzerland) Ltd. has implemented appropriate technical and organizational measures to protect data from unauthorized processing and disclosure and applies appropriate safeguards to guarantee adequate protection of such data.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the U.S. and other countries. App Store is a service mark of Apple Inc.