Many highly educated and intelligent investors often indulge in designing complex trading strategies in an attempt to maximize their returns. However, Morgan Housel, the author of “The Psychology of Money,” warns that the more complex the investment approach, the worse the long-term performance may be.
Housel pointed out on the podcast “The Burnouts” that some smart people like to make their investments as “complex as possible,” such as chasing after hot stocks or trying to time the market precisely, but these strategies usually have difficulty sustaining success. He believes that the smartest approach is actually the opposite – making investments simple, brainless, and even somewhat boring, and sticking with them for the long term.
“If you can sustain the average market returns over the long run, the end result can be astonishing,” Housel said. Even if it’s just at the market average level, the cumulative effect over 20 years will surpass that of most people.
Financial planner Ben Smith also shares a similar view, believing that investments should be “simple and easy,” rather than seeking thrills and high risks. CNBC cited him as saying that excessive stock picking or frequent strategy adjustments often lead to lower returns.
Passive investing is a commonly recommended approach, such as investing in low-cost index funds that track market indices like the S&P 500, aiming to replicate their overall performance. Due to the difficulty for professional fund managers to consistently outperform the market over the long term, this method has advantages in terms of costs and stability. Morningstar data shows that between 2015 and 2024, only about 7% of active mutual fund managers performed better than the average passive fund.
This strategy has long been advocated by renowned investor Warren Buffett as well. As early as 1993 in his shareholder letter, Buffett wrote that “outsiders” who continuously invest in index funds may outperform the majority of professionals in the long run. In 2017, during an interview with CNBC’s “On the Money” program, he reiterated that most investors should hold shares of all large companies in a low-cost manner, rather than trying to pick the so-called “best companies.”
Buffett believes that holding diversified, low-cost index funds for the long term is “virtually always the most sensible choice,” as it can capture the long-term upward trend of the market and reduce the impact of a single stock’s sharp decline on overall returns.
Housel concludes that the key question in investing is not “how much maximum return can be earned,” but “how long can it be sustained.” Stable and long-term average returns are the real shortcut to achieving financial goals.