Simplify your investing to avoid ‘opportunities for failure’

Retail investors are back. Josh Brown at The Reformed Broker in a recent post highlights the rush of investors back into the stock market, five years and nearly a 100% return up from the bottom. Unfortunately this is not altogether surprising. Investors are prone to sell amidst panic conditions and buy amidst euphoria. The point isn’t that the stock market will sell-off tomorrow just that our natural tendencies work against us investors.

That is why in the past I have advocated that investors find an investment approach that is simple, and potentially suboptimal, that they can follow through market cycles. Earlier this year I wrote:

That is the attraction of Norway-like strategies that emphasize diversification and portfolio rebalancing are so attractive. By simplifying the portfolio process they reduce the number of decisions we make it increases the chance that we stick to our original plan. I have written it many times but having a plan, even a sub-optimal one, that you can stick to is preferable to having no plan at all. The ongoing challenge for advisors and investors alike is to find a plan that they will not abandon at the first sign of trouble.

I thought it was worth revisiting this observation after reading an excerpt from How to Fail at Almost Everything and Still Win Big: Kind of the Story of My Life by Scott Adams of Dilbert fame. In it Adams talks about how the world is broken into those people who are simplifier and those that are optimizers and how those two types of strategies work (and don’t). In an excerpt at BoingBoing Adams writes:

Optimizing is often the strategy of people who have specific goals and feel the need to do everything in their power to achieve them. Simplifying is generally the strategy of people who view the world in terms of systems. The best systems are simple, and for good reason. Complicated systems have more opportunities for failure. Human nature is such that we’re good at following simple systems and not so good at following complicated systems.

The whole piece is worth a read but I thought that quote captures the problem facing investors and traders alike. The world of investing is infinitely complex. It feels like we need complex strategies to generate returns. The problem is that as Adams says complicated systems are more likely to lead to “opportunities for failure.” We cannot control what the markets do. We can however control our own actions. For the vast majority of investors a simple system that we can follow over time will in all likelihood lead to better outcomes.

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  • Tadas ViskantaAbnormal Returns has over its seven-year life become a fixture in the financial blogosphere. Over thousands of posts we have striven to bring the best of the financial blogosphere to readers. In that time the idea of a “forecast-free investment blog” remains as useful as it did six years ago. More »

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