I am a gamer. I like role-playing games like Fallout and Final Fantasy as well as real-time strategy games like Starcraft. However, according to the internet, I play these games all wrong. I like to take my time and get lost in the story. This is not the fastest or most efficient way to beat a game which puts me dangerously close to being a ‘Filthy Casual’ in internet-speak. That is, my goal is not to optimize my playthrough like a ‘Hardcore’ player might. It could be worse. I could be a n3wb.
This really does tie back to investing, I swear.
There are countless blog posts dedicated to crafting the most efficient portfolio. Finance Twitter is full of people who will argue asset allocations past the decimal point. Advisor forums are almost toxic with folks who belabor semantics, dredge up endless white papers, and worship at the altar of Modern Portfolio Theory. They are slaves to statistics, having lost sight of serving their human clients long ago. If this was the rap game, they’d fall under the label of ‘studio gangster’, someone who talks the talk, but can’t walk the walk. In the video game world, these folks would be advocates of a min/max playstyle. That is, playing the game not for fun, but to game the system as thoroughly as possible.
What’s wrong with investing as efficiently as possible? Isn’t the goal to make as much money as you can?
To answer these questions, let’s go back to video games. If the goal is to beat the game, then optimizing the crap out of your playthrough makes sense. However, the goal of video gaming is not to beat the game. Video games are entertainment. The goal is to maximize player enjoyment. Sure, it’s possible to beat Super Mario Brothers in under 5 minutes, but that defeats the purpose of the whole thing.
The goal of investing is not to make as much money as possible. Investing is a means to achieve financial goals. If your goal is to accumulate as much money as possible, then maybe a min/max approach is what you’re looking for. For most of us, though, our goals are more along the lines of maintaining a certain standard of living while saving for retirement or passing money on to the next generation (or their kids).
Seeking to optimize one’s portfolio has other pitfalls.
Portfolio optimization leans heavily on the past. Today’s optimized portfolio could probably protect you against a financial crisis like the one in 2008. The problem is that 2008’s optimized portfolio probably didn’t – it was geared towards protecting against a tech bubble bursting. Portfolio optimization is always fighting the last war.
I’m not against statistics or Modern Portfolio Theory, but they are frameworks for interpreting the world, not laws of nature. They provide valuable context to what would otherwise be noise. It doesn’t make sense to allow statistics to hold your portfolio hostage when human irrationality colors the entire investing landscape.
Rather than seeking optimization, investors would do well to implement a plan that they can stick with over the long term. We have to first be honest with ourselves about our true goals and what we’re willing to sacrifice to achieve them. For example, I’d love to have a beach house in Malibu, but I would have to feed my family canned tuna and ramen noodles for the next 20 years to do this. Not worth it. Embrace the Filthy Casual lifestyle by understanding what investment game you’re playing and more importantly, why you’re playing it. Ignore the comments section of life which is filled with people telling you to ‘stop liking what I don’t like’. You are playing your game, not theirs.