A theory of one's general investing mindset: 'Good enough' or 'Optimize'

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A theory of one's general investing mindset: 'Good enough' or 'Optimize'

Post by willthrill81 » Fri Aug 23, 2019 3:34 pm

I think that I might finally be wrapping my head around the source of many of the ongoing debates about various issues on this forum, including 'best diversifiers', 'TSM vs. factors', etc. I believe that investors' underlying goal may explain a lot of this and be useful for understanding both our own investing behavior and others'.

Much of one's investing preferences seems to come down to whether someone is content with 'good enough' or wants to 'optimize'.

In general, those with the 'good enough' mindset seem to be more likely to use the 3-fund portfolio or something very much akin to it, find total bond market to be the only fixed income component they desire, they eschew factors, lean toward 'pure' buy-and-hold, strongly favor simplicity, etc.

Those with the 'optimize' mindset seem to be more likely to use 'alternative' fixed income instruments (e.g. CDs, long-term Treasuries), factor funds, use some form of 'timing' in their strategy, etc.

I think that there may be some degree of 'crossover' in the two mentalities, such as an investor who generally has a 'good enough' mindset but substitutes some total bond market for long-term Treasuries. But generally speaking, I suspect that most investors mostly fit into one of these two mindsets.

Let me make it entirely clear that I don't believe that either of these investing mindsets is inherently superior to the other. They are just different. Saying that one is superior to the other is like saying that one flavor of ice cream is better than one another; it is inherently a subjective issue, and trying to force one's own mindset onto others is, at best, futile and, at worst, counter-productive.

Knowing one's own mindset could be useful (i.e. 'know thyself'), and knowing others' mindset could be useful for understanding their vantage point in many of our discussions of various strategies.

Thoughts?
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Re: A theory of one's general investing mindset: 'Good enough' or 'Optimize'

Post by H-Town » Fri Aug 23, 2019 3:54 pm

Interesting topic.

At the very core, I believe most of investors are better off with "good enough" mindset. There are bad things waiting to happen when investors keep tweaking their portfolio. It's easier said than done. I still catch myself doing those things: buy the dip, use fixed income as dry powder, shift AA to buy low/sell high in U.S./international allocation, document & analyze every moves I made to the portfolio. It's more of a hobby to "optimize" portfolio, rather than actually achieving optimization.

Now that I have gone through all those things, I keep myself within some certain acts: TLH, rebalancing to a fixed AA, and ... wait for it ... buy the dip. Those things will now be considered as "good enough" for me.

Just want to add a note: I never regret anything I did to my portfolio. The only regret is not saving early enough... Oh well... It's ... good enough.
Last edited by H-Town on Fri Aug 23, 2019 4:06 pm, edited 1 time in total.

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Re: A theory of one's general investing mindset: 'Good enough' or 'Optimize'

Post by Phineas J. Whoopee » Fri Aug 23, 2019 3:56 pm

Yes, and it extends far beyond investing topics. See satisficing vs. maximizing.

For what it's worth, I personally am more of a satisficer. Anybody who's read my posts and is shocked by that could raise their hand.

One of the sources of contention here is when a poster decides what they would do is exactly what everybody else should do.

PJW

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Re: A theory of one's general investing mindset: 'Good enough' or 'Optimize'

Post by rbaldini » Fri Aug 23, 2019 3:58 pm

Maybe those who are content with "good enough" are also optimizers, but their cost function includes the time and effort spent in micro-optimizing returns. Two hours spent on some data analysis, which might do little to increase my return, are two hours I can't spend fishing. 8-)

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Re: A theory of one's general investing mindset: 'Good enough' or 'Optimize'

Post by BillWalters » Fri Aug 23, 2019 4:00 pm

I’m on team good enough. Much better for my mental health to dump the whole damn thing in life strategy and never have to think about it.

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Re: A theory of one's general investing mindset: 'Good enough' or 'Optimize'

Post by megabad » Fri Aug 23, 2019 4:01 pm

My inclination is to agree somewhat with rbaldini's post above. I think there are a great many 3 fund portfolio folks that truly would claim to be optimizers.

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Re: A theory of one's general investing mindset: 'Good enough' or 'Optimize'

Post by friar1610 » Fri Aug 23, 2019 4:03 pm

Good theory and probably true. I'd just like to add that there's probably a significant number of investors who morph from optimizers to good enoughers for a variety of reasons, growing older maybe being the primary one.
Friar1610

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Re: A theory of one's general investing mindset: 'Good enough' or 'Optimize'

Post by willthrill81 » Fri Aug 23, 2019 4:08 pm

friar1610 wrote:
Fri Aug 23, 2019 4:03 pm
Good theory and probably true. I'd just like to add that there's probably a significant number of investors who morph from optimizers to good enoughers for a variety of reasons, growing older maybe being the primary one.
I've personally morphed from 'good enough' to 'optimize'.
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Re: A theory of one's general investing mindset: 'Good enough' or 'Optimize'

Post by nisiprius » Fri Aug 23, 2019 4:10 pm

I think your theory is right, and it is sometimes described as the difference between "satisficers" and "optimizers." "To satisfice" is a word coined by Herbert R. Simon in 1956, and although my computer is putting wiggly red lines under it, Merriam-Webster recognizes it.

Wikipedia's summary is
Satisficing is a decision-making strategy or cognitive heuristic that entails searching through the available alternatives until an acceptability threshold is met. The term satisficing, a portmanteau of satisfy and suffice, was introduced by Herbert A. Simon in 1956... Simon used satisficing to explain the behavior of decision makers under circumstances in which an optimal solution cannot be determined. He maintained that many natural problems are characterized by computational intractability or a lack of information, both of which preclude the use of mathematical optimization procedures. He observed in his Nobel Prize in Economics speech that "decision makers can satisfice either by finding optimum solutions for a simplified world, or by finding satisfactory solutions for a more realistic world. Neither approach, in general, dominates the other, and both have continued to co-exist in the world of management science".

Simon formulated the concept within a novel approach to rationality, which posits that rational choice theory is an unrealistic description of human decision processes and calls for psychological realism. He referred to this approach as bounded rationality.
I think John C. Bogle's position on this is clear; for example, here:
...Successful investing involves doing just a few things right and avoiding serious mistakes...
Pillar 2. When All Else Fails, Fall Back on Simplicity.
There are an infinite number of strategies worse than this one: Commit, over a period of a few years, half of your assets to a stock index fund and half to a bond index fund. Ignore interim fluctuations in their net asset values. Hold your positions for as long as you live, subject only to infrequent and marginal adjustments as your circumstances change. When there are multiple solutions to a problem, choose the simplest one.
A point worth making is that in the consumer world, sellers have a self-interest in pushing people to be optimizers. In reality the differences between competing products are often small. Pepsi must not only convince Coke drinkers that Pepsi tastes better than Coke, they must first get Coke drinkers to agree that "if I can convince you that Pepsi tastes better, then you are obligated to switch."
Last edited by nisiprius on Fri Aug 23, 2019 4:18 pm, edited 1 time in total.
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Re: A theory of one's general investing mindset: 'Good enough' or 'Optimize'

Post by friar1610 » Fri Aug 23, 2019 4:11 pm

willthrill81 wrote:
Fri Aug 23, 2019 4:08 pm
friar1610 wrote:
Fri Aug 23, 2019 4:03 pm
Good theory and probably true. I'd just like to add that there's probably a significant number of investors who morph from optimizers to good enoughers for a variety of reasons, growing older maybe being the primary one.
I've personally morphed from 'good enough' to 'optimize'.
Maybe you're getting younger as time goes by. :wink:
Friar1610

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Re: A theory of one's general investing mindset: 'Good enough' or 'Optimize'

Post by megabad » Fri Aug 23, 2019 4:15 pm

nisiprius wrote:
Fri Aug 23, 2019 4:10 pm
I think your theory is right, and it is sometimes described as the difference between "satisficers" and "optimizers." "To satisfice" is a word coined by Herbert R. Simon in 1956, and although my computer is putting wiggly red lines under it, Merriam-Webster recognizes it.

Wikipedia's summary is
Satisficing is a decision-making strategy or cognitive heuristic that entails searching through the available alternatives until an acceptability threshold is met. The term satisficing, a portmanteau of satisfy and suffice, was introduced by Herbert A. Simon in 1956... Simon used satisficing to explain the behavior of decision makers under circumstances in which an optimal solution cannot be determined. He maintained that many natural problems are characterized by computational intractability or a lack of information, both of which preclude the use of mathematical optimization procedures. He observed in his Nobel Prize in Economics speech that "decision makers can satisfice either by finding optimum solutions for a simplified world, or by finding satisfactory solutions for a more realistic world. Neither approach, in general, dominates the other, and both have continued to co-exist in the world of management science".

Simon formulated the concept within a novel approach to rationality, which posits that rational choice theory is an unrealistic description of human decision processes and calls for psychological realism. He referred to this approach as bounded rationality.
I think John C. Bogle's position on this is clear; for example, here:
...Successful investing involves doing just a few things right and avoiding serious mistakes...
Pillar 2. When All Else Fails, Fall Back on Simplicity.
There are an infinite number of strategies worse than this one: Commit, over a period of a few years, half of your assets to a stock index fund and half to a bond index fund. Ignore interim fluctuations in their net asset values. Hold your positions for as long as you live, subject only to infrequent and marginal adjustments as your circumstances change. When there are multiple solutions to a problem, choose the simplest one.
These are great quotes. Although, I would point out that they essentially seem to indicate that "optimizers" may not really be optimizing at all.

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Re: A theory of one's general investing mindset: 'Good enough' or 'Optimize'

Post by downshiftme » Fri Aug 23, 2019 4:15 pm

Strongly in favor of "good enough" over "optimize"

When things change, as they inevitably will, the good enough approach has a very good chance of still being good enough. The optimized approach, especially if highly optimized, risks being on the wrong side of the change and going from highly optimized to highly optimized to be maximally impacted by the unexpected change.

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Re: A theory of one's general investing mindset: 'Good enough' or 'Optimize'

Post by willthrill81 » Fri Aug 23, 2019 4:36 pm

downshiftme wrote:
Fri Aug 23, 2019 4:15 pm
When things change, as they inevitably will, the good enough approach has a very good chance of still being good enough. The optimized approach, especially if highly optimized, risks being on the wrong side of the change and going from highly optimized to highly optimized to be maximally impacted by the unexpected change.
There's no a priori reason, TMK, though to believe that the 'good enough' mindset is less risky than the 'optimize' approach.

I see many 'good enough' folks here who seem to me at least to assume that TSM, the 3-fund portfolio, etc. will give them the returns they need to achieve their investment goals and that, as such, any deviation from this is putting the achievement of those goals at risk. Obviously, these two assumptions are flawed.
Last edited by willthrill81 on Fri Aug 23, 2019 4:40 pm, edited 1 time in total.
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Re: A theory of one's general investing mindset: 'Good enough' or 'Optimize'

Post by iceport » Fri Aug 23, 2019 4:38 pm

Interesting theory! According to the OPs generalizations, I have a blend of the two mindsets.
megabad wrote:
Fri Aug 23, 2019 4:01 pm
I think there are a great many 3 fund portfolio folks that truly would claim to be optimizers.
Just to develop this idea a bit further, I think many investors come to see the whole concept that a portfolio can be "optimized" (anywhere but in back-testing exercises) to be illusory. I am slowly migrating towards this perspective.

Some might view elaborate efforts to "optimize" to be motivated by a desire to convince oneself that they have more control over their performance than they really do. In that case, the mindsets might be better phrased: "Good as Anything Else" or "Optimize."

There's still the idea of "accepting less" involved, but instead of believing they're accepting a less than optimum portfolio, they are accepting that they have less control over their outcome than they would like. :|
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Re: A theory of one's general investing mindset: 'Good enough' or 'Optimize'

Post by TomatoTomahto » Fri Aug 23, 2019 4:49 pm

Phineas J. Whoopee wrote:
Fri Aug 23, 2019 3:56 pm
For what it's worth, I personally am more of a satisficer. Anybody who's read my posts and is shocked by that could raise their hand.
In my early days on BH, I was in a thread with SSCritic and, if memory serves, LiveSoft. That thread introduced me to the word(?) satisficer, and it had quite a transformative effect. My nature was probably a fertile ground for the seed to grow in, but the word informed my taking SS early, moving away from a percentage based asset allocation to a quasi Liability Matching Portfolio, my changing my wife’s contributions from t401k to r401k, and so on.

Maybe it comes down to something no more complicated than that the optimization threads making my head spin with their careful calculations and tangential theoretical debates. As I like to say, God loves fools and drunkards, and I don’t drink.
Okay, I get it; I won't be political or controversial. The Earth is flat.

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Re: A theory of one's general investing mindset: 'Good enough' or 'Optimize'

Post by TomCat96 » Fri Aug 23, 2019 4:54 pm

willthrill81 wrote:
Fri Aug 23, 2019 3:34 pm
I think that I might finally be wrapping my head around the source of many of the ongoing debates about various issues on this forum, including 'best diversifiers', 'TSM vs. factors', etc. I believe that investors' underlying goal may explain a lot of this and be useful for understanding both our own investing behavior and others'.

Much of one's investing preferences seems to come down to whether someone is content with 'good enough' or wants to 'optimize'.

In general, those with the 'good enough' mindset seem to be more likely to use the 3-fund portfolio or something very much akin to it, find total bond market to be the only fixed income component they desire, they eschew factors, lean toward 'pure' buy-and-hold, strongly favor simplicity, etc.

Those with the 'optimize' mindset seem to be more likely to use 'alternative' fixed income instruments (e.g. CDs, long-term Treasuries), factor funds, use some form of 'timing' in their strategy, etc.

I think that there may be some degree of 'crossover' in the two mentalities, such as an investor who generally has a 'good enough' mindset but substitutes some total bond market for long-term Treasuries. But generally speaking, I suspect that most investors mostly fit into one of these two mindsets.

Let me make it entirely clear that I don't believe that either of these investing mindsets is inherently superior to the other. They are just different. Saying that one is superior to the other is like saying that one flavor of ice cream is better than one another; it is inherently a subjective issue, and trying to force one's own mindset onto others is, at best, futile and, at worst, counter-productive.

Knowing one's own mindset could be useful (i.e. 'know thyself'), and knowing others' mindset could be useful for understanding their vantage point in many of our discussions of various strategies.

Thoughts?

I come from a school of practicality. While I can be highly theoretical, such theories were generalizations of my experiences. Those generalizations have given me an intuition for what is "good enough" concerning diversification.

I think people on this website argue the market, and the efficiency of it, but purely from an academic standpoint. It becomes a game of trading hits from schools of thought.

But my experience has taught me, if you trade in very thin markets (for example collectibles), and then you trade in thicker markets, ascending up the latter until you hit equities, you get a good idea and feel for markets. You get a good idea for "what is efficiency?" or "what is diversification?" beyond just the academic literature. Once you get a feel for those things, you can get a feel for what is "good enough"

How does the academic literature define "good enough?" It doesn't. You have to learn it. I believe you can of course supplement experience with lots of data and backtesting.

I asked myself given the market portfolio, can I do better? The boglehead answer is no. They drop it and leave it at that. That is dogma. And you're a naughty boy if you transgress.

Here's what I asked myself.
Given the market portfolio, can I do better? If I can do better, what am I giving up? Quantify it. Quantify exactly how much you are giving up by deviating from the market portfolio. Quantify exactly how much you are gaining by deviating from the market portfolio. Recycle. Run the numbers again. Do it again, over and over and over.

You need to give yourself some serious legitimate options to work with, each complete with data driven assessments as to what you are gaining and what you are losing. Gains are of course gains, but with what consistency? Losses come in the risk and volatility department, but how relevant are the economic conditions that may have caused those losses in the past?

The question is not to accede to dogma, but to find its exact boundaries and limits.

The dogmatic are people-based. They want agreement. They want to find others like minded.

The data driven are neutral. It doesn't matter where the boundary lies. If you say the truth is over there, then the salient question is not whether the truth is over there, but to find where the truth ends--to not seek agreement as a cause to rally around, but to simply accept the truth, move on and find the next truth.


Some stocks do better than the market. But all data seems to show they cannot be picked with any good semblance of long term consistency.
I don't have to regurgitate Taylor's long list.

What then about picking diversified sectors? Biotech? Tech? Health care?
Again, the data seems to suggest that the "increased diversification" of picking by sector still isnt enough. It still doesn't do as well as the market, and is plagued by long periods of underperformance and volatility. On this aspect, I found myself in agreement with Mr. Larimore.

What about Factors? Moving up the chain now---large cap, midcap value, mid cap growth, small cap value, etc.
Personally I saw something there, some data I liked, but it wasn't sufficiently compelling for me. Perhaps if I had done more research.
I did not find anything to prove Mr. Swedroe wrong. But...the formulation of a strategy how to best accommodate such data, was beyond the scope of what I wanted to do given the risks and rewards.

I went up the chain one level closer to the market portfolio--Essentially a tilted up mid and small cap mix(market weighed), which places me at 100% US as well.
In this sense, my conclusion was a bit of a hybrid between Mr. Swedroes factors and Mel's unloved midcaps --"a simplified portfolio" broadly diversifying their ideas.

I think it was moderator prudent who posted something interesting hinting that over some long term period, the extra premium from such a mix resulted in a portfolio that was double the market portfolio. Another posted countered saying that the extra gains were minute, less than an extra percent a year.

Having run the data myself, I knew that both were true (for the most part). Even a small excess gain compounded for decades can result in a portfolio of a dramatically different size at the finish line.

There was a series of optimizations, and finally, a point where i folded my hands and said "good enough"
Last edited by TomCat96 on Fri Aug 23, 2019 5:00 pm, edited 3 times in total.

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Re: A theory of one's general investing mindset: 'Good enough' or 'Optimize'

Post by willthrill81 » Fri Aug 23, 2019 4:55 pm

Phineas J. Whoopee wrote:
Fri Aug 23, 2019 3:56 pm
Yes, and it extends far beyond investing topics. See satisficing vs. maximizing.

For what it's worth, I personally am more of a satisficer. Anybody who's read my posts and is shocked by that could raise their hand.

One of the sources of contention here is when a poster decides what they would do is exactly what everybody else should do.

PJW
Yes, it does extend far beyond investing. But whether one is a satisficer or optimizer may be domain specific as well. For instance, I'm an optimizer when it comes to personal finance, while my wife would be a satisficer. But when it comes to deciding which camera to buy, for instance, she's an optimizer, and I'm a satisficer.

Perhaps one's involvement (i.e. ongoing, persistent interest) in a topic is an underlying determinant of which manner of goal-seeking one gravitates toward.
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Re: A theory of one's general investing mindset: 'Good enough' or 'Optimize'

Post by bloom2708 » Fri Aug 23, 2019 4:56 pm

It gets more interesting when optimizing may or not do better than satisficing. Most optimizers feel they come out ahead. At least in certain periods.
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Re: A theory of one's general investing mindset: 'Good enough' or 'Optimize'

Post by flyingaway » Fri Aug 23, 2019 5:01 pm

An asset allocation between 70/30 and 30/70 is good enough. But we sill want to optimize it.

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Re: A theory of one's general investing mindset: 'Good enough' or 'Optimize'

Post by Cyclesafe » Fri Aug 23, 2019 5:06 pm

I've simplified from weighting factors to a three fund in tax advantaged plus muni's in taxable portfolio. Where I get obsessively complicated though is in asset placement, smoothing taxation, optimizing Roth conversions, SPIA timing, cash flow etc. etc. All things that I must decide on now that will have far reaching impact.

Of course I can't predict future returns, tax schemes, Medicare, social security, or my future spending, but by setting assumptions and testing around them, I learn a whole lot about how the world, as assumed, affects my future financial situation. (The NIIT is a real sleeper, for example. Its non-indexed exclusion on MAGI will affect more and more taxpayers similarly to the old formulation of the AMT.)
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Re: A theory of one's general investing mindset: 'Good enough' or 'Optimize'

Post by megabad » Fri Aug 23, 2019 5:08 pm

Cyclesafe wrote:
Fri Aug 23, 2019 5:06 pm
(The NIIT is a real sleeper, for example. Its non-indexed exclusion on MAGI will affect more and more taxpayers similarly to the old formulation of the AMT.)
...groan...IRMAA...groan...

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Re: A theory of one's general investing mindset: 'Good enough' or 'Optimize'

Post by willthrill81 » Fri Aug 23, 2019 5:10 pm

bloom2708 wrote:
Fri Aug 23, 2019 4:56 pm
It gets more interesting when optimizing may or not do better than satisficing. Most optimizers feel they come out ahead. At least in certain periods.
And that's a great point, one that I should have addressed in the OP.

Those with the 'good enough' (i.e. satisficer) mindset may indeed feel that they are better off in the end than had they 'optimized'. And 'optimizers' may feel that their mindset and approach leaves them better off than otherwise.

Note that these feelings could exist no matter which group had better returns, for instance. Obviously, optimizers may feel better if they earned higher returns than satisficers, but satisficers may feel fine because they didn't know that the optimizers' strategy would pay off and/or are content with whatever they have. And if the situation were reversed and satisficers have higher returns, optimizers may feel that they took on less risk than satisficers and are content with their returns, while satisficers can be happy that they 'outperformed'.

So I can envision it being the case that those with a satisficer (optimizer) mindset should adopting a satisficing (optimizing) strategy if they want to maximize their investing satisfaction.
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Re: A theory of one's general investing mindset: 'Good enough' or 'Optimize'

Post by pdavi21 » Fri Aug 23, 2019 5:18 pm

Optimizer is not the right word unless you make more money than the "satisficer". Likewise, "satisficer" suggests that the "satisficer" could have made more money if they had optimized.

In most cases, optimizing tends to be reliably successful.
In investing, however, the optimized solution is not (EDIT: always) known until after the fact...and only some people know it, while others know it is completely false.

For complex investing ideas (besides getting the lowest ER fund or highest interest paying fixed income product of a given risk), tinkerer and "nothing-doer" (I couldn't figure out a good antonym for tinkerer), are probably more useful.
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Re: A theory of one's general investing mindset: 'Good enough' or 'Optimize'

Post by willthrill81 » Fri Aug 23, 2019 5:20 pm

pdavi21 wrote:
Fri Aug 23, 2019 5:18 pm
Optimizer is not the right word unless you make more money than the "satisficer". Likewise, "satisficer" suggests that the "satisficer" could have made more money if they had optimized.
The OP notes that these terms are used to describe investors' goals, not their results.
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Re: A theory of one's general investing mindset: 'Good enough' or 'Optimize'

Post by Maven » Fri Aug 23, 2019 5:24 pm

What are your thoughts that Optimizers optimize because the three fund strategy is simply too boring for them? (I say that with the utmost respect to the Three Fund!) It doesn't challenge them and leaves them with no reason to research, plug #s and tinker with their portfolios.

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Re: A theory of one's general investing mindset: 'Good enough' or 'Optimize'

Post by UpperNwGuy » Fri Aug 23, 2019 5:25 pm

Good enough = willingness to settle for market returns.
Optimize = striving to beat the market.

Count me in the good enough camp.

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Re: A theory of one's general investing mindset: 'Good enough' or 'Optimize'

Post by willthrill81 » Fri Aug 23, 2019 5:30 pm

Maven wrote:
Fri Aug 23, 2019 5:24 pm
What are your thoughts that Optimizers optimize because the three fund strategy is simply too boring for them? (I say that with the utmost respect to the Three Fund!) It doesn't challenge them and leaves them with no reason to research, plug #s and tinker with their portfolios.
That may be true for some, but I doubt that it's true of all. Optimizers might want to diversify their portfolio beyond TSM, TBM, and int'l stock. They may want to reduce tail risk in what they believe to be a way than the 3-fund can. And so on.
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Re: A theory of one's general investing mindset: 'Good enough' or 'Optimize'

Post by willthrill81 » Fri Aug 23, 2019 5:31 pm

UpperNwGuy wrote:
Fri Aug 23, 2019 5:25 pm
Good enough = willingness to settle for market returns.
Optimize = striving to beat the market.
Larry Swedroe strongly appears to me to be an optimizer, but I don't think that he would say that he's trying to beat the market per se (i.e. generate alpha). For one, he's often participating in different markets.
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Re: A theory of one's general investing mindset: 'Good enough' or 'Optimize'

Post by UpperNwGuy » Fri Aug 23, 2019 5:37 pm

willthrill81 wrote:
Fri Aug 23, 2019 5:31 pm
UpperNwGuy wrote:
Fri Aug 23, 2019 5:25 pm
Good enough = willingness to settle for market returns.
Optimize = striving to beat the market.
Larry Swedroe strongly appears to me to be an optimizer, but I don't think that he would say that he's trying to beat the market per se (i.e. generate alpha). For one, he's often participating in different markets.
I think Larry is trying to beat the market. He may not describe it that way, but that's the essence of what he's doing.

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Re: A theory of one's general investing mindset: 'Good enough' or 'Optimize'

Post by pdavi21 » Fri Aug 23, 2019 5:39 pm

willthrill81 wrote:
Fri Aug 23, 2019 5:20 pm
pdavi21 wrote:
Fri Aug 23, 2019 5:18 pm
Optimizer is not the right word unless you make more money than the "satisficer". Likewise, "satisficer" suggests that the "satisficer" could have made more money if they had optimized.
The OP notes that these terms are used to describe investors' goals, not their results.
The problem I have is with the word itself. Optimization is not a process of seeking improvement. It is a process of improvement.

That doesn't make sense because everyone's goal is to optimize except for the masochist. The action of improving something is what separates the optimizer from the inaction of the "satisficer" who really is arguably optimizing something else.

I am definitely in the optimizer (still don't like the word) camp. You can tell by how much time I spend on Bogleheads.org. Either that or I am "satisficing" (don't like that word either) the other parts of my life.
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Re: A theory of one's general investing mindset: 'Good enough' or 'Optimize'

Post by willthrill81 » Fri Aug 23, 2019 5:40 pm

pdavi21 wrote:
Fri Aug 23, 2019 5:39 pm
That doesn't make sense because everyone's goal is to optimize except for the financial masochist.
I think that some of the satisficers would disagree heartily with that, but we'll see.
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Re: A theory of one's general investing mindset: 'Good enough' or 'Optimize'

Post by megabad » Fri Aug 23, 2019 5:41 pm

willthrill81 wrote:
Fri Aug 23, 2019 5:31 pm
Larry Swedroe strongly appears to me to be an optimizer, but I don't think that he would say that he's trying to beat the market per se (i.e. generate alpha). For one, he's often participating in different markets.
I think I agree that trying to "beat the market" might not be the right phrase, I might say something like "trying to acquire the best risk adjusted outcomes". Larry is definitely an "optimizer". The multitude of literature he puts out is a testament to it. Whether you agree with him or not, his material is generally heavily researched and well discussed -- two classic signs of an "optimizer" in my book (as described here).
Last edited by megabad on Fri Aug 23, 2019 5:48 pm, edited 2 times in total.

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Re: A theory of one's general investing mindset: 'Good enough' or 'Optimize'

Post by pdavi21 » Fri Aug 23, 2019 5:42 pm

willthrill81 wrote:
Fri Aug 23, 2019 5:40 pm
pdavi21 wrote:
Fri Aug 23, 2019 5:39 pm
That doesn't make sense because everyone's goal is to optimize except for the financial masochist.
I think that some of the satisficers would disagree heartily with that, but we'll see.
My mistake. I shouldn't say "financial" there, but by definition (of the made up word), "satisficers" want the best but will settle for good enough. Their goal is still to get the best.

EDIT: (And that's why it can't apply to investing because the best is often/usually unknown.)
Last edited by pdavi21 on Fri Aug 23, 2019 5:50 pm, edited 1 time in total.
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Re: A theory of one's general investing mindset: 'Good enough' or 'Optimize'

Post by columbia » Fri Aug 23, 2019 5:47 pm

Since the optimal portfolio can not be predicted, good enough is my approach.

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Re: A theory of one's general investing mindset: 'Good enough' or 'Optimize'

Post by Kevin M » Fri Aug 23, 2019 5:57 pm

For those who are saying that "the market" is "good enough" for them, or something like that, what is "the market"? I bet most people saying that don't hold a portfolio that reflects the global market of stocks and bonds, although I'm pretty sure a few attempt to come close to that.

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Re: A theory of one's general investing mindset: 'Good enough' or 'Optimize'

Post by vineviz » Fri Aug 23, 2019 6:26 pm

willthrill81 wrote:
Fri Aug 23, 2019 5:30 pm
Maven wrote:
Fri Aug 23, 2019 5:24 pm
What are your thoughts that Optimizers optimize because the three fund strategy is simply too boring for them? (I say that with the utmost respect to the Three Fund!) It doesn't challenge them and leaves them with no reason to research, plug #s and tinker with their portfolios.
That may be true for some, but I doubt that it's true of all. Optimizers might want to diversify their portfolio beyond TSM, TBM, and int'l stock. They may want to reduce tail risk in what they believe to be a way than the 3-fund can. And so on.
Also, different investors might look at the same portfolio or strategy and describe them differently.

Because of my interests, personality and/or my Econ degree + MBA + CFA I tend to look at my portfolio (which is complicated by Bogleheads standards) as being a “good enough” version of my ideal portfolio.

Someone else might legitimately view it as obsessively optimized.

Maybe simplicity is in the eyes of the beholder?
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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Re: A theory of one's general investing mindset: 'Good enough' or 'Optimize'

Post by ResearchMed » Fri Aug 23, 2019 6:29 pm

nisiprius wrote:
Fri Aug 23, 2019 4:10 pm
I think your theory is right, and it is sometimes described as the difference between "satisficers" and "optimizers." "To satisfice" is a word coined by Herbert R. Simon in 1956, and although my computer is putting wiggly red lines under it, Merriam-Webster recognizes it.

Wikipedia's summary is
Satisficing is a decision-making strategy or cognitive heuristic that entails searching through the available alternatives until an acceptability threshold is met. The term satisficing, a portmanteau of satisfy and suffice, was introduced by Herbert A. Simon in 1956... Simon used satisficing to explain the behavior of decision makers under circumstances in which an optimal solution cannot be determined. He maintained that many natural problems are characterized by computational intractability or a lack of information, both of which preclude the use of mathematical optimization procedures. He observed in his Nobel Prize in Economics speech that "decision makers can satisfice either by finding optimum solutions for a simplified world, or by finding satisfactory solutions for a more realistic world. Neither approach, in general, dominates the other, and both have continued to co-exist in the world of management science".

Simon formulated the concept within a novel approach to rationality, which posits that rational choice theory is an unrealistic description of human decision processes and calls for psychological realism. He referred to this approach as bounded rationality.
I think John C. Bogle's position on this is clear; for example, here:
...Successful investing involves doing just a few things right and avoiding serious mistakes...
Pillar 2. When All Else Fails, Fall Back on Simplicity.
There are an infinite number of strategies worse than this one: Commit, over a period of a few years, half of your assets to a stock index fund and half to a bond index fund. Ignore interim fluctuations in their net asset values. Hold your positions for as long as you live, subject only to infrequent and marginal adjustments as your circumstances change. When there are multiple solutions to a problem, choose the simplest one.
A point worth making is that in the consumer world, sellers have a self-interest in pushing people to be optimizers. In reality the differences between competing products are often small. Pepsi must not only convince Coke drinkers that Pepsi tastes better than Coke, they must first get Coke drinkers to agree that "if I can convince you that Pepsi tastes better, then you are obligated to switch."
My initial reaction to the original question was going to be "But HOW do I know... how could I know... what the 'optimum' is or when I've reached it...?"

But this quote from Nisi's post seems to jump our and capture the situation:

Simon used satisficing to explain the behavior of decision makers under circumstances in which an optimal solution cannot be determined

In a case like investing for retirement, one can't really know if one "succeeded" in "optimizing", even if one happened to stumble upon it somehow.

And even IF one knew "what optimizing would end up looking like", it's not clear that one could know "how to get there" in advance.

I do think when I started out taking this seriously (belatedly, given our ages, early/mid 2000's), I was striving for "the best", or at least, "the best that *I* could do". And that included trying to learn, learn, LEARN, which ended up leading me to BH, thank goodness!
All of that certainly changed some of the things we - mostly i - were doing, but it rather soon became something like satisficing, even though we didn't yet associate it with that word.

One other tweak, for us: We also adopted a YOLO approach (You Only Live Once), so we were juggling the two goals.

We had so many thoughts about travel, but we really hadn't done much more than "weekends before or after business trips" (and not even "before AND after"!), except for two special trips, one in conjunction with a business trip to London, and the other that we then splurged on for a very special honeymoon after we finally married and made things "legal" :wink:

So we had two competing goals at that time: trying to arrange a safe/comfortable retirement (hopefully starting in the next few years, finally) AND enjoying life more!

In our case, we decided that we "had enough" in retirement accounts, so we stopped adding more (although Employer still adds a sort of "match" that doesn't require anything from Employee).
And we starting spending from current income for some very nice trips, which we've been enjoying thoroughly.

Obviously, we could tilt the balance in either direction, so I don't know how to label that, when we don't really have any set of equations such that we can try to maximize a single outcome...

However, we are happy, and, yes, *satisfied* with how the past several years have been, and what the future looks like.

I should add that this great bull market absolutely did have an effect on the specifics of how we were able to do this.
But importantly, and to the point, and we have discussed this, we would probably have also "been happy" if the bull market hadn't happened. We 'never would have known..."

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Re: A theory of one's general investing mindset: 'Good enough' or 'Optimize'

Post by shess » Fri Aug 23, 2019 6:42 pm

friar1610 wrote:
Fri Aug 23, 2019 4:03 pm
Good theory and probably true. I'd just like to add that there's probably a significant number of investors who morph from optimizers to good enoughers for a variety of reasons, growing older maybe being the primary one.
I made this switch at the point when I realized that for all of the effort I had put into optimizing things over the years, I couldn't really say with any certainty whether I had actually improved anything. Many of the things I had put effort into *should* have improved things, and I mostly didn't make mistakes, but when I tried to model what a low-effort 3-fund type of portfolio would have done, if I gained anything, it clearly wasn't all that much. Any excess gains seemed likely to be factor differences rather than insight.

Meanwhile, I could very easily see how much my career and spending patterns helping my portfolio size. In fact, it was pretty clear that I was probably better off taking any effort I was putting towards my portfolio and instead spend it on making myself a more valuable employee, either by relaxing better in my downtime, or by taking classes, or by networking.

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Re: A theory of one's general investing mindset: 'Good enough' or 'Optimize'

Post by columbia » Fri Aug 23, 2019 6:50 pm

I took a psychology of decision making class with Herb Simon. He was kind of smart. :P

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Re: A theory of one's general investing mindset: 'Good enough' or 'Optimize'

Post by chw » Fri Aug 23, 2019 6:54 pm

Interesting thoughts will... hmmm Satisficer- interesting word, which I suppose describes me at this point in my investing life. In my early years I would say I was definitely an Optimizer (as I think most young investors are wired). Finding Bogleheads, and reading the various theories over the past 6-7 years have made me realize that most factors will likely always revert to the mean. Some folks may have the smarts and fortitude to time exposure to some of these factors, but I feel that those strategies are destined to also end up reverting to the investing mean of returns.

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Re: A theory of one's general investing mindset: 'Good enough' or 'Optimize'

Post by Fallible » Fri Aug 23, 2019 7:10 pm

Among my thoughts is that the good-enough investor and the optimizer investor are often one and the same (being human, why not?), with one side suspecting good enough is pretty darn good, yet unable to quite resist the lure of the optimal, or just a peek at what it might be before getting hooked.

Another thought is that it’s a good time to repeat the thoughts of Morgan Housel in two of his columns that have appeared on this forum.

In his "Good Enough" column, he begins with NASA's New Horizons spacecraft that passed by Pluto on a nine-and-a-half years, three-billion mile trip. According to NASA, the trip "took about one minute less than predicted when the craft was launched in January 2006."

Housel considers this
a great reminder that some fields work with amazing precision. They are governed by pure math and physics, and aren't burdened by the whims of human emotion.

It's also a great reminder that investing is not one of these fields.
https://www.fool.com/investing/general/ ... nough.aspx

A second Housel column is “The Art of Not Caring.” Among the things he's stopped caring about:
Getting other investors to agree with me
.
Let's say your weather app says it'll be 78 and sunny tomorrow, and mine says it will be 74 and overcast.
Would we argue about this? Go on TV and duke it out? Call each other names?
Of course not. We'd say, "Eh, let's just see what happens. Probably doesn't matter either way."

Investors don't think this way. The fights people get into about whose forecast is right are off the charts.

Unlike weather, money is an emotional subject. And unlike tomorrow's temperature, our investment decisions are in our control. So many investors get offended when others disagree with them. But once you realize that A) your views are just as biased as everyone else's and B) there's a good chance you're both wrong, you stop seeing any reason to argue. Debate, sure. But life's too short to argue.
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Re: A theory of one's general investing mindset: 'Good enough' or 'Optimize'

Post by Cheez-It Guy » Fri Aug 23, 2019 7:31 pm

I’m looking to optimize for simplicity.

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Re: A theory of one's general investing mindset: 'Good enough' or 'Optimize'

Post by EnjoyIt » Fri Aug 23, 2019 7:32 pm

Just because someone “optimizes” and I think that word is rather loose, does not necessarily mean they are doing something better. A better term is “adding complexity in the hopes of boosting results.”

Sometimes complexity is not worth what you put into it.

Sometimes complexity harms you.

As you said, there is no guarantee in investing.

A great example of adding complexity is when a CPA convinces a client that being incorporated will save them in Medicare taxes. Sure they may save $1000 that year, but they pay the CPA and W2 processing company $1500.

Sure, one can do all those tasks themselves and keep the tax savings, but now they have to make sure all the filings are correct which may add significant stress. Maybe not worth the $1000 in tax savings.

Another example. Using a target date fund in a taxable account is easy. One can add complexity to buy each fund separately and use municipal bonds for tax purposes. But, now they have to rebalance themselves, and take on the risk of not doing all the management properly eventually decreasing one’s return

Last example, one may add complexity by tilting into small cap and value based on past results, but it is very well possible those past results may not exist anymore since factor investing has gained some popularity and thereby hurting their portfolio.

Again, “optimization” is not the right term and neither is “good enough.”

I choose to be incorporated and do my own taxes for the above benefits, I choose to have muni’s in taxable, I choose not to tilt because I don’t believe in there being value for me. Am I an optimizer or am I good enough?

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Re: A theory of one's general investing mindset: 'Good enough' or 'Optimize'

Post by Random Walker » Fri Aug 23, 2019 7:34 pm

I suppose I fall into the “optimize” mindset. Us Bogleheads all believe in passive/index, low costs, tax efficiency, diversification. Once one of us gets that far in our investing philosophy and application, further portfolio improvements are incremental at the edges. My attitude is that if an improvement is small but nonetheless an improvement, then why not make it. That path has taken me to a quite complex portfolio by Boglehead standards.
As one goes down the “optimize” path, marginal improvements are smaller and marginal costs greater. The best diversifier is also the first and cheapest: high quality bonds. The improvements to portfolios are only potential and the additional costs are certain. But to me, if the likely marginal improvement outweighs the certain marginal cost, then may as well continue down the optimize path towards complexity. If one sticks to the basic Boglehead tenets of passive, no market timing, no individual security selection, then even a complex portfolio is essentially on autopilot and pretty easy to manage.

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Re: A theory of one's general investing mindset: 'Good enough' or 'Optimize'

Post by EnjoyIt » Fri Aug 23, 2019 7:35 pm

And just to add to my comment. There is a tax bracket where one is better off not using municipal bonds in taxable. Guess what I have capital gains on those municipal bonds today and my prior optimization for a tiny boost in yield may hurt me.

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Re: A theory of one's general investing mindset: 'Good enough' or 'Optimize'

Post by Ben Mathew » Fri Aug 23, 2019 7:48 pm

I am a satisficer, but I would guess that it's at a level closer to optimality than the typical investor will be willing to get to.

At some level, though, everybody is a satisficer. It's impossible for anyone to compute everything.

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Re: A theory of one's general investing mindset: 'Good enough' or 'Optimize'

Post by Atticus » Fri Aug 23, 2019 7:50 pm

Fallible wrote:
Fri Aug 23, 2019 7:10 pm
Among my thoughts is that the good-enough investor and the optimizer investor are often one and the same (being human, why not?), with one side suspecting good enough is pretty darn good, yet unable to quite resist the lure of the optimal, or just a peek at what it might be before getting hooked.
This describes me pretty well. There's always a bit of mental tug-of-war between the part of my brain that thinks I could improve my odds of a better outcome, and the part that insists the extra complexity is gaining only that - extra complexity. In the end, I've stuck with the simplest portfolio that keeps me from tinkering further.

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Re: A theory of one's general investing mindset: 'Good enough' or 'Optimize'

Post by Ferdinand2014 » Fri Aug 23, 2019 7:52 pm

willthrill81 wrote:
Fri Aug 23, 2019 3:34 pm
I think that I might finally be wrapping my head around the source of many of the ongoing debates about various issues on this forum, including 'best diversifiers', 'TSM vs. factors', etc. I believe that investors' underlying goal may explain a lot of this and be useful for understanding both our own investing behavior and others'.

Much of one's investing preferences seems to come down to whether someone is content with 'good enough' or wants to 'optimize'.

In general, those with the 'good enough' mindset seem to be more likely to use the 3-fund portfolio or something very much akin to it, find total bond market to be the only fixed income component they desire, they eschew factors, lean toward 'pure' buy-and-hold, strongly favor simplicity, etc.

Those with the 'optimize' mindset seem to be more likely to use 'alternative' fixed income instruments (e.g. CDs, long-term Treasuries), factor funds, use some form of 'timing' in their strategy, etc.

I think that there may be some degree of 'crossover' in the two mentalities, such as an investor who generally has a 'good enough' mindset but substitutes some total bond market for long-term Treasuries. But generally speaking, I suspect that most investors mostly fit into one of these two mindsets.

Let me make it entirely clear that I don't believe that either of these investing mindsets is inherently superior to the other. They are just different. Saying that one is superior to the other is like saying that one flavor of ice cream is better than one another; it is inherently a subjective issue, and trying to force one's own mindset onto others is, at best, futile and, at worst, counter-productive.

Knowing one's own mindset could be useful (i.e. 'know thyself'), and knowing others' mindset could be useful for understanding their vantage point in many of our discussions of various strategies.

Thoughts?
Global Asset Allocation: A survey of the worlds top asset asset allocations:

Portfolio models included: permanent portfolio,60/40,Swensen,El-Erian,Warren Buffett 90/10, Rob Arnott, Global, risk parity all seasons, Marc Faber. 1973-2014 time frame.

“Even with the difference in allocations, the spread between the worst-performing allocation, the Permanent Portfolio at 4.12%, and the best, the El-Erian Portfolio at 5.67%, was only 1.84%. That is astonishing. If you exclude the Permanent Portfolio, all of the allocations are within one percentage point.”

“What if someone was able to predict the best-performing strategy in 1973 and then decided to implement it via the average mutual fund? We also looked at the effect if someone decided to use a financial advisor who then invested client assets in the average mutual fund. Predicting the best asset allocation, but implementing it via the average mutual fund would push returns down to roughly even with the Permanent Portfolio. If you added advisory fees on top of that, it had the effect of transforming the BEST performing asset allocation into lower than the WORST. Think about that for a second. Fees are far more important than your asset allocation decision! Now what do you spend most of your time thinking about? Probably the asset allocation decision and not fees! This is the main point we are trying to drive home in this book–if you are going to allocate to a buy and hold portfolio you want to be paying as little as possible in total fees and costs. “

It was an ‘ah-hah’ moment for me. I put a stake in the ground and picked the simplest most low cost portfolio I could come up with, which was FXAIX (Fidelity 500 index) (It was an investor class higher fee version at the onset) at currently 0.015 ER and completely free T-bills through Fidelity on auto roll. That’s less then $100 for every $1,000,000 with my current allocation in fees. I am definitely in the good enough and keep it simple and as low cost as possible. I was definitely in the optimizer camp before this. I was trading ETF’s like there was no tomorrow, buying individual stocks and changing my portfolio allocations and model every several months. Since I have adopted this plan, I haven’t made a single change in over 5 years. My bad behaviors I think completely washed away any perceived diversification, volatility or risk/return benefit with any other short lived portfolio.
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Re: A theory of one's general investing mindset: 'Good enough' or 'Optimize'

Post by willthrill81 » Fri Aug 23, 2019 8:53 pm

Ben Mathew wrote:
Fri Aug 23, 2019 7:48 pm
At some level, though, everybody is a satisficer. It's impossible for anyone to compute everything.
Ultimately, yes, although some go further down the road before being satisfied than others.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: A theory of one's general investing mindset: 'Good enough' or 'Optimize'

Post by EnjoyIt » Fri Aug 23, 2019 9:00 pm

perfect is the enemy of good

-Voltaire

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