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

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

Post by marcopolo » Sun Aug 25, 2019 11:02 am

vineviz wrote:
Sun Aug 25, 2019 10:54 am
marcopolo wrote:
Sun Aug 25, 2019 10:49 am
Seems like there is plenty of road kill on the path of optimization that would indicate otherwise.
The path to “good enough” has plenty of thorns too.

Portfolios entirely in CDs or short term bonds, portfolios lacking international diversification, etc are all examples of people saying “good enough” to strategies that are hurting their chances of achieving goals.

In other words, shooting yourself in the foot isn’t the exclusive domain of either optimizers or satisficers.
I agree with you completely.

I was simply questioning the contention that through optimizing efforts, you had the potential to end up better, with the only risk being the time spent to do it.

I was just pointing out that optimization efforts also carries the risk of possible under performance, despite the effort spent to implement it.

Do you disagree with that?
Once in a while you get shown the light, in the strangest of places if you look at it right.

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

Post by NYCguy » Sun Aug 25, 2019 11:07 am

marcopolo wrote:
Sun Aug 25, 2019 10:49 am
willthrill81 wrote:
Sun Aug 25, 2019 10:16 am
NYCguy wrote:
Sun Aug 25, 2019 9:08 am
I have no problem with the Factor crowd. As an optimizer, I seriously considered it for several months. My conclusion was that it was unlikely to out or under perform a three fund portfolio but one may need to wait potentially several decades before knowing the answer.
It seems a bit like Pascal's wager to me. If the optimizers are wrong, then they expended some quantity, perhaps a little or a lot, of unnecessary effort, and if they truly enjoy such efforts, then it may 'cost' them little as long as they can keep their costs down. But if they are right, then they will have significantly greater wealth.

To be honest, given that we have so many self-reported satisficers that post so frequently on this forum, I don't know that I really buy the argument some of them make that they aren't optimizing because of the effort involved. If personal finance is your 'hobby', then optimizing is not a 'chore'. The argument others make that one simply cannot optimize beyond the 3-fund portfolio or something similar is more compelling, IMHO.
Are you suggesting that the only cost of the various optimization efforts is the time spent to do the analysis?

You don't think it is possible that the end result ends up worse that the 3-fund approach?

Seems like there is plenty of road kill on the path of optimization that would indicate otherwise.
+1.

Full disclosure: while I’ve identified myself as an optimizer who adopts the three fund portfolio more or less, I am allocating between 5% and 10% of my portfolio to private equity and venture-capital capital funds. As I have posted elsewhere, I am skeptical that this variation is going to improve my ultimate performance over the three fund portfolio, I am prepared to take the risk, and I will let you know the answer in about 15 years.
If your out-go is greater than your income, your upkeep will be your DOWNFALL.

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

Post by vineviz » Sun Aug 25, 2019 11:17 am

NYCguy wrote:
Sun Aug 25, 2019 11:01 am
vineviz wrote:
Sun Aug 25, 2019 10:54 am
marcopolo wrote:
Sun Aug 25, 2019 10:49 am
Seems like there is plenty of road kill on the path of optimization that would indicate otherwise.
The path to “good enough” has plenty of thorns too.

Portfolios entirely in CDs or short term bonds, portfolios lacking international diversification, etc are all examples of people saying “good enough” to strategies that are hurting their chances of achieving goals.

In other words, shooting yourself in the foot isn’t the exclusive domain of either optimizers or satisficers.
Agreed. OPs characterization of “good enough“ is some variation on the three fund portfolio not what your characterizing.
At the risk of being contrary after finding agreement, not all 3 fund portfolios are created equally.

50% Vanguard 500 Index Fund Admiral Shares (VFIAX)
10% Vanguard Developed Markets Index Fund Admiral Shares (VTMGX)
40% Vanguard Prime Money Market Fund (VMMXX)

Isn’t the same as

35% Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX)
25% Vanguard Total International Stock Index Fund Admiral Shares (VTIAX)
40% Vanguard Long-Term Bond Index Fund Admiral Shares (VBLAX)

in terms of being well diversified or having reasons similar expected returns, for instance. But we often see claims that each difference between those portfolios is “close enough”. I’ve sometimes said so myself, in moments of weakness. 😉
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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

Post by Random Walker » Sun Aug 25, 2019 11:32 am

vineviz wrote:
Sun Aug 25, 2019 11:17 am

in terms of being well diversified or having reasons similar expected returns, for instance. But we often see claims that each difference between those portfolios is “close enough”. I’ve sometimes said so myself, in moments of weakness. 😉
Once we set up an AA, it should pretty much be autopilot from then on. So I don’t see why additional complexity is an issue. Although marginal improvements may be small, they are improvements nonetheless. Why not make them?

Dave

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

Post by kfitz1313 » Sun Aug 25, 2019 11:39 am

willthrill81 wrote:
Sat Aug 24, 2019 7:25 pm
vineviz wrote:
Sat Aug 24, 2019 4:11 pm
EnjoyIt wrote:
Sat Aug 24, 2019 3:41 pm
We have a decent amount of posters who believe optimizing is somehow superior when it could just as easily be inferior which is why "optimizing" is a poor term for this discussion. I think a better term is "adding complexity in the hopes of superior returns."

Many here as you pointed out believe a TSM portfolio is as optimized as one could get.
This is an example of the "'evangelizing' for a 'satisficing' mindset" to which I believe that willthrill81 was referring, and seems to be based in part on a misunderstanding of the concept of optimizing.

Both optimizers and satisficers are making decisions in the face of uncertainty about future outcomes. The distinction isn't about who is more likely to attain the optimal solution in hindsight, but rather about the decision-making process they use before the outcome is known.

Imagine two people, one optimizer and one satisficer, who each need a new car.

An optimization approach might be to seek out the car with the highest "score" according to the following formula : (horsepower + torque + legroom^2)/price.

A satisficer approach might be to seek out a car with the following criteria: buy the first car they find that has four or more seats, no identifiable mechanical defects, has an engine with at least 2.0L of displacement, and costs less than $20,000.

Both car buyers are exercising their personal preferences, with no implication that their approach would be superior for anyone but themselves.
You really are on an analogy kick today! :beer

Yes, that's correct. As I noted in the OP and later again, the difference in mindset applies to one's goal, not one's results.
Stepping slightly further back, you can say that both car buyers above are really applying the preference of, "Find the first car that X", where it simply takes a bit more time to find X for buyer one and less time for buyer two. The goals are different, but the process isn't actually different.

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

Post by vineviz » Sun Aug 25, 2019 11:46 am

kfitz1313 wrote:
Sun Aug 25, 2019 11:39 am
Stepping slightly further back, you can say that both car buyers above are really applying the preference of, "Find the first car that X", where it simply takes a bit more time to find X for buyer one and less time for buyer two. The goals are different, but the process isn't actually different.
Not quite.

The satisficer is doing “find the first available car that X”.

In principle, the optimizer must calculate a score for every available car.

Obviously no one can actually pursue that strategy to such an extreme, but this is one of the fundamental characteristics of an optimizer approach.
"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 kfitz1313 » Sun Aug 25, 2019 11:50 am

vineviz wrote:
Sun Aug 25, 2019 11:46 am
kfitz1313 wrote:
Sun Aug 25, 2019 11:39 am
Stepping slightly further back, you can say that both car buyers above are really applying the preference of, "Find the first car that X", where it simply takes a bit more time to find X for buyer one and less time for buyer two. The goals are different, but the process isn't actually different.
Not quite.

The satisficer is doing “find the first available car that X”.

In principle, the optimizer must calculate a score for every available car.

Obviously no one can actually pursue that strategy to such an extreme, but this is one of the fundamental characteristics of an optimizer approach.
The optimizer is also doing "find the first available car that X". The difference is that there is only one available with the calculated score. That does take more time and energy to find, but in principle it is the same.

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

Post by stlutz » Sun Aug 25, 2019 12:21 pm

This thread is several pages in now, but I disagree with the premise of the original post that factor vs. non-factor investing really relates much at all to optimization.

One can be a satisficer and still believe small/value stocks will beat the market. However, when it comes to picking funds the satisficer might say, "My account is at Vanguard, and they have a low-cost small/value index fund, so I'll use that." The optimizer will run multiple different factor regressions and examine the portfolio characteristics of 20 different funds/ETFs and then attempt to determine the "best" small/value fund to use.

A satisficer may want to use a target fund for their 401K. That is the default option in their plan, it is relatively low cost and is well diversified, so they go with that, even through the portfolio may not be exactly what they might want it to be. The optimizer notices that they can use a brokerage windows and observes that they can also use Vanguard TR funds in addition to the default TR funds in the plan. They will fully investigate the differences between the two and make a determination of what option is the best and use that.

The optimizer who is constructing a liability-matching portfolio puts together a ladder of individual TIPS to ensure that they will receive exactly $20,000 of income (inflation adjusted) for each year of retirement. The satisficer sees the value in this approach but wants to use the TIPS index fund available in their 401K. They will live with the fact that the fund option may result in getting $19,500 of income one year and $20,500 the next.

Pretty much *every* thead on this forum has an optimize vs. satisfice dimension going on within it. Tax efficiency is one I completely skipped over. Lots of factor investors find an acceptable solution and just go with that. A small-value tilt is generally the result. There are numerous way factor tilt beyond this rather standard default approach. I would go so far as to say that *most* tilters/factor investors on this board actually are satisficers more than optimizers.

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

Post by james22 » Sun Aug 25, 2019 12:27 pm

tadamsmar wrote:
Sun Aug 25, 2019 9:06 am
james22 wrote:
Sun Aug 25, 2019 3:14 am
I'm an optimizer, in large part because I find it entertaining.

(My nurse/physical trainer/fitness competitor girlfriend makes fun of me for pretending my financial interest is only responsible when I avoid medical check-ups, drink like a fish, etc.)

What I don't understand is why satisficers spend so much time on the Theory board arguing with optimizers - shouldn't they be fishing instead?
We satisfiers are fishers of men, trying to bring them to the true investing path, grasshopper. We are never satisfied.
:sharebeer

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

Post by Fallible » Sun Aug 25, 2019 12:37 pm

pkcrafter wrote:
Sat Aug 24, 2019 8:24 pm
Does indexing satisfy? Well, It does more than that. Furthermore, If some strategy comes along that actually is better (hasn't yet), the market will incorporate it. It is very difficult to outperform index investing over long periods of time. Actually it is extremely difficult.

http://www.aei.org/publication/more-evi ... ant-do-it/
https://www.marketwatch.com/story/why-w ... 2017-04-24
Paul
A good reminder that this is all very much about the decades-old passive vs. active debate, with "good enough" reminiscent of the "don't-settle-for-average" argument that actives use to try to convince the market-average passives that they can somehow beat the market, consistently. A never-ending debate...
John Bogle on his often bumpy road to low-cost indexing: "When a door closes, if you look long enough and hard enough, if you're strong enough, you'll find a window that opens."

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

Post by vineviz » Sun Aug 25, 2019 12:41 pm

kfitz1313 wrote:
Sun Aug 25, 2019 11:50 am
vineviz wrote:
Sun Aug 25, 2019 11:46 am
kfitz1313 wrote:
Sun Aug 25, 2019 11:39 am
Stepping slightly further back, you can say that both car buyers above are really applying the preference of, "Find the first car that X", where it simply takes a bit more time to find X for buyer one and less time for buyer two. The goals are different, but the process isn't actually different.
Not quite.

The satisficer is doing “find the first available car that X”.

In principle, the optimizer must calculate a score for every available car.

Obviously no one can actually pursue that strategy to such an extreme, but this is one of the fundamental characteristics of an optimizer approach.
The optimizer is also doing "find the first available car that X". The difference is that there is only one available with the calculated score. That does take more time and energy to find, but in principle it is the same.
If there is a world that defines “first” and “last” as synonyms, then I concede that in that world you are correct.

Seriously though you are hand-waving away the differences and then proclaiming them to be the same. All I can say to that is that behavioral psychologists dissent from that view.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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

Post by H-Town » Sun Aug 25, 2019 12:43 pm

I think a wide spectrum of optimizers might sometimes forget that the biggest enemy to your portfolio is your thyself. The risk of making an irreversible mistake to your portfolio is too high for a marginal reward in higher percentage of return.

The more important factor of building wealth is accumulating wealth. You gotta save money in the first place in order to get return of your investment. You can control the amount of money saved but you can't control the outcome of the market with whatever portfolio strategy you employ.

I'm all about optimizing my wealth building process. But I would rather focus on what I can control (saving) than what I cannot control (outcomes of a certain investing strategies and market return).

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

Post by StormShadow » Sun Aug 25, 2019 12:44 pm

willthrill81 wrote:
Fri Aug 23, 2019 3:34 pm
Thoughts?
Yeah.
Keep it simple, stupid.

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

Post by dbr » Sun Aug 25, 2019 12:45 pm

This is a good observation.

My own opinion is that the primary financial objectives of most investors, including those here, really is "good enough" whether they admit it or not.

As to "optimize" there is no doubt that a very large fraction of the discussion here is about optimizing. I think that comes about for several reasons:

1. Most of us exist in an environment where "being the best you can be" is an unspoken command. Not following that command with respect to investing seems to be "bailing out" in the most irresponsible and personally embarrassing manner. One can just note how many threads that ask "what is the best . . . .?"

2. While many areas of human endeavor allow easy quantification of what is best, investing is not an area where the answer is so evident, but those who wish to invest cannot avoid the models so available in other endeavors.

3. The financial services industry sells itself on the proposition that optimum performance can be bought or, of not bought, can be found out through the application of intelligence and effort or maybe the discovery of "the secret."

The final thought is that it may be the concept of "optimize" does not meaningfully apply to investing and that chasing optimization is more an entertainment that a serious undertaking. That does not mean that there is no distinction between investing intelligently in service of one's objectives and randomly tossing money into investments.

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

Post by kfitz1313 » Sun Aug 25, 2019 12:47 pm

vineviz wrote:
Sun Aug 25, 2019 12:41 pm
kfitz1313 wrote:
Sun Aug 25, 2019 11:50 am
vineviz wrote:
Sun Aug 25, 2019 11:46 am
kfitz1313 wrote:
Sun Aug 25, 2019 11:39 am
Stepping slightly further back, you can say that both car buyers above are really applying the preference of, "Find the first car that X", where it simply takes a bit more time to find X for buyer one and less time for buyer two. The goals are different, but the process isn't actually different.
Not quite.

The satisficer is doing “find the first available car that X”.

In principle, the optimizer must calculate a score for every available car.

Obviously no one can actually pursue that strategy to such an extreme, but this is one of the fundamental characteristics of an optimizer approach.
The optimizer is also doing "find the first available car that X". The difference is that there is only one available with the calculated score. That does take more time and energy to find, but in principle it is the same.
If there is a world that defines “first” and “last” as synonyms, then I concede that in that world you are correct.

Seriously though you are hand-waving away the differences and then proclaiming them to be the same. All I can say to that is that behavioral psychologists dissent from that view.
This is not me trying to be difficult. I didn't say "last", I reframed it as first being equal to only, which I suppose you are reframing as last. That is semantic and we can agree to disagree. The first buyer simply has a tighter Venn diagram and so all cars are eliminated but one. The second buyer has more elements in the set and they're all equally good. As you pointed out earlier, they are simply indifferent. I'm merely suggesting the first buyer is also indifferent, but with a set of one. I don't think you really disagree with this.

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

Post by afan » Sun Aug 25, 2019 12:58 pm

vineviz wrote:
Sun Aug 25, 2019 8:33 am
afan wrote:
Sun Aug 25, 2019 8:25 am
So many optimizers hold cap weighted index funds not because they have decided that they are good enough but because they do not believe there is reliable evidence that something else is better.
Those sound like the same thing to me.
Actually not.
One could choose a portfolio that is good enough while believing that one could predictably do better by optimizing. Such an investor may have decided that optimizing is too much trouble but that better results would be achieved with enough work, or cost, devoted to optimizing.

Alternatively, one could be an optimizer and end up with a cap weighted index portfolio not because it is good enough but because it is optimal.

Two different goals "good enough" vs "optimal". One could decide that the cap weighted portfolio is not just good enough but that it is optimal. No predictably better returns to be had, nothing more to do.
We don't know how to beat the market on a risk-adjusted basis, and we don't know anyone that does know either | --Swedroe | We assume that markets are efficient, that prices are right | --Fama

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

Post by vineviz » Sun Aug 25, 2019 1:03 pm

afan wrote:
Sun Aug 25, 2019 12:58 pm

One could choose a portfolio that is good enough while believing that one could predictably do better by optimizing. Such an investor may have decided that optimizing is too much trouble but that better results would be achieved with enough work, or cost, devoted to optimizing.
When someone reaches the point where marginal cost exceeds the the marginal benefit, they’ve reached their personal optimal solution.

And when someone decides that the market portfolio can’t be improved at any cost, they’ve reached a point of either delusion or confusion.
"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 » Sun Aug 25, 2019 1:05 pm

vineviz wrote:
Sun Aug 25, 2019 11:46 am
kfitz1313 wrote:
Sun Aug 25, 2019 11:39 am
Stepping slightly further back, you can say that both car buyers above are really applying the preference of, "Find the first car that X", where it simply takes a bit more time to find X for buyer one and less time for buyer two. The goals are different, but the process isn't actually different.
Not quite.

The satisficer is doing “find the first available car that X”.

In principle, the optimizer must calculate a score for every available car.

Obviously no one can actually pursue that strategy to such an extreme, but this is one of the fundamental characteristics of an optimizer approach.
This is a rather nice, simplified way of looking at the comparison.

But it also points out a problem with optimization: What IS the "score" or outcome measure one is aiming to optimize... how is it measured?

And by that, I don't just mean "amount of money at <time or age>".
HOW is one going to structure the strategy such that the goal is "optimized"?

I don't think I understand how that can even be done.

To copy from my earlier post, where I quote from Nisi's post, including from Wikipedia:

"...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..."

We may or may not have the "computational ability" that would be needed (I'd argue "not", given an almost infinite number of strategic choices, including *changing* choices "whenever"), but we certainly ARE operating with a lack of information about the future economic/financial situations, individual or societal.

Even retrospectively, the calculations to determine a strategy that would have optimized the final goal, given initial and ongoing amounts/choices... that's going to stretch the "computational ability" these days, anyway.
But to try to do this PROspectively? How?

Isn't in all a matter of "how much time/energy/money" one wants to put into the procedures/estimates/modeling?
How in the world does one know, for example, whether including 10% TIPS will be better than 15% (or even 10.5% vs 30%), given the lack of a crystal ball... or even in any TIPS should be included at all?
What does "optimizing" here even mean?

Here is one definitlon of "optimizing":

"Finding an alternative with the most cost effective or highest achievable performance under the given constraints, by maximizing desired factors and minimizing undesired ones. In comparison, maximization means trying to attain the highest or maximum result or outcome without regard to cost or expense. Practice of optimization is restricted by the lack of full information, and the lack of time to evaluate what information is available (see bounded reality for details). In computer simulation (modeling) of business problems, optimization is achieved usually by using linear programming techniques of operations research." *
[from http://www.businessdictionary.com/defin ... ation.html]

In an arena of uncertainty such as finances/investing, isn't it just a matter of degree of the satisficing, and how much time, and which methods, one decides to use to do it?

* And I'd suggest that the linear programming is still satisficing, given that in "business", or for most business questions, all of the actual variables may not yet be incorporated, or their weights/etc., not yet understood exactly...

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

Post by Portfolio7 » Sun Aug 25, 2019 1:35 pm

TomCat96 wrote:
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'.
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"
Great Post. There is a point beyond which little robust advantage can be proven or shown, and recognizing where that point resides is dangerously difficult. The three fund portfolio may be that point (some will assert that to be the case, others are unsure, and some are convinced it's good but can be improved upon). If one is the kind for which a further process needs to happen, BH principles keep one grounded during that process.

As Charlie Munger once said, “It is remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be very intelligent.”

I admit to some BH sins... but in all cases there are self-imposed boundaries, guided by BH principles, that limit the potential damage I can do to myself. I stuck to those boundaries in 2008 and came out strong because of it. That's a BH advantage. I will rely more and more on that advantage as I creep into the 'Red Zone' of the 10 years before retirement (and 10 years after), when it's even tougher, emotionally, to weather periods of extreme market volatility.

Is that satisficing? Is that optimizing? Heck if I know. I do believe it's practical.
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Re: A theory of one's general investing mindset: 'Good enough' or 'Optimize'

Post by vineviz » Sun Aug 25, 2019 2:18 pm

ResearchMed wrote:
Sun Aug 25, 2019 1:05 pm
But it also points out a problem with optimization: What IS the "score" or outcome measure one is aiming to optimize... how is it measured?

And by that, I don't just mean "amount of money at <time or age>".
HOW is one going to structure the strategy such that the goal is "optimized"?

I don't think I understand how that can even be done.
ResearchMed wrote:
Sun Aug 25, 2019 1:05 pm
In an arena of uncertainty such as finances/investing, isn't it just a matter of degree of the satisficing, and how much time, and which methods, one decides to use to do it?
Psychologists tend to refer to "maximizers" and "satisficers" but they do so on a continuum. So, yes, there is an aspect here where it is "just a matter of degree" but I'd argue that this doesn't mean the distinction is without merit.

As for how optimization can be done, I think several posts in this thread are getting hung up on the fact that the realized future outcomes cannot be known with certainty. But this is irrelevant to the question.

The main difference between an optimizer/maximizer and a satisficer is in the approach to evaluating available options.

In the extreme case, a satisficer stops searching at the first solution which they expect will exceed their minimum requirement.

In the extreme case, an optimizer evaluates all solutions in order to choose the one they expect to maximize criteria.

I consider myself to be pretty far toward the "maximizer" end of the spectrum when it comes to retirement portfolio construction, so I'll lay out a condensed version of my criteria as an example.

I have built a portfolio that simultaneously maximizes expected diversification, minimizes expected expense, has an expected real return greater than or equal to Vanguard Target Retirement 2035 Fund (VTTHX), and has an expected annualized volatility of less than 15%.

I can estimate all the parameters needed to compute each of those metrics, and balance the four criteria as best as I can.

How likely is it that that I'll look back in 15 years and see that the portfolio I've chosen ex ante will have turned out to the one actually produce the best ex post result?

Not very. Have I optimized my chances of getting the best ex post result given my current information and those criteria? I think so.
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Re: A theory of one's general investing mindset: 'Good enough' or 'Optimize'

Post by decapod10 » Sun Aug 25, 2019 2:23 pm

vineviz wrote:
Sun Aug 25, 2019 2:18 pm
ResearchMed wrote:
Sun Aug 25, 2019 1:05 pm
But it also points out a problem with optimization: What IS the "score" or outcome measure one is aiming to optimize... how is it measured?

And by that, I don't just mean "amount of money at <time or age>".
HOW is one going to structure the strategy such that the goal is "optimized"?

I don't think I understand how that can even be done.
ResearchMed wrote:
Sun Aug 25, 2019 1:05 pm
In an arena of uncertainty such as finances/investing, isn't it just a matter of degree of the satisficing, and how much time, and which methods, one decides to use to do it?
Psychologists tend to refer to "maximizers" and "satisficers" but they do so on a continuum. So, yes, there is an aspect here where it is "just a matter of degree" but I'd argue that this doesn't mean the distinction is without merit.

As for how optimization can be done, I think several posts in this thread are getting hung up on the fact that the realized future outcomes cannot be known with certainty. But this is irrelevant to the question.

The main difference between an optimizer/maximizer and a satisficer is in the approach to evaluating available options.

In the extreme case, a satisficer stops searching at the first solution which they expect will exceed their minimum requirement.

In the extreme case, an optimizer evaluates all solutions in order to choose the one they expect to maximize criteria.

I consider myself to be pretty far toward the "maximizer" end of the spectrum when it comes to retirement portfolio construction, so I'll lay out a condensed version of my criteria as an example.

I have built a portfolio that simultaneously maximizes expected diversification, minimizes expected expense, has an expected real return greater than or equal to Vanguard Target Retirement 2035 Fund (VTTHX), and has an expected annualized volatility of less than 15%.

I can estimate all the parameters needed to compute each of those metrics, and balance the four criteria as best as I can.

How likely is it that that I'll look back in 15 years and see that the portfolio I've chosen ex ante will have turned out to the one actually produce the best ex post result?

Not very. Have I optimized my chances of getting the best ex post result given my current information and those criteria? I think so.
Do you have a more detailed breakdown of your approach somewhere? I'm always interested to hear how people tinker.

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

Post by vineviz » Sun Aug 25, 2019 2:32 pm

decapod10 wrote:
Sun Aug 25, 2019 2:23 pm
Do you have a more detailed breakdown of your approach somewhere? I'm always interested to hear how people tinker.
It's not very expository, but here's a thread about my portfolio.
"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 NYCguy » Sun Aug 25, 2019 3:02 pm

vineviz wrote:
Sun Aug 25, 2019 11:17 am
NYCguy wrote:
Sun Aug 25, 2019 11:01 am
vineviz wrote:
Sun Aug 25, 2019 10:54 am
marcopolo wrote:
Sun Aug 25, 2019 10:49 am
Seems like there is plenty of road kill on the path of optimization that would indicate otherwise.
The path to “good enough” has plenty of thorns too.

Portfolios entirely in CDs or short term bonds, portfolios lacking international diversification, etc are all examples of people saying “good enough” to strategies that are hurting their chances of achieving goals.

In other words, shooting yourself in the foot isn’t the exclusive domain of either optimizers or satisficers.
Agreed. OPs characterization of “good enough“ is some variation on the three fund portfolio not what your characterizing.
At the risk of being contrary after finding agreement, not all 3 fund portfolios are created equally.

50% Vanguard 500 Index Fund Admiral Shares (VFIAX)
10% Vanguard Developed Markets Index Fund Admiral Shares (VTMGX)
40% Vanguard Prime Money Market Fund (VMMXX)

Isn’t the same as

35% Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX)
25% Vanguard Total International Stock Index Fund Admiral Shares (VTIAX)
40% Vanguard Long-Term Bond Index Fund Admiral Shares (VBLAX)

in terms of being well diversified or having reasons similar expected returns, for instance. But we often see claims that each difference between those portfolios is “close enough”. I’ve sometimes said so myself, in moments of weakness. 😉
Sorry, I have to agree with you again (even if you want to be disagreeable :) ). Those are clearly not the same portfolios. When posters on this forum such as OP refer to a 3 fund portfolio, it is your second example. Asset allocation and risk tolerance within a variation of the three fund portfolio is a different topic.
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Re: A theory of one's general investing mindset: 'Good enough' or 'Optimize'

Post by nps » Sun Aug 25, 2019 3:26 pm

vineviz wrote:
Sun Aug 25, 2019 8:33 am
afan wrote:
Sun Aug 25, 2019 8:25 am
So many optimizers hold cap weighted index funds not because they have decided that they are good enough but because they do not believe there is reliable evidence that something else is better.
Those sound like the same thing to me.
Want to optimize? Yes/no
Believe I can optimize? Yes/no

They don't sound like the same thing to me.

Are "I want to live forever" and "I believe I can live forever" the same thing?

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

Post by decapod10 » Sun Aug 25, 2019 3:27 pm

vineviz wrote:
Sun Aug 25, 2019 2:32 pm
decapod10 wrote:
Sun Aug 25, 2019 2:23 pm
Do you have a more detailed breakdown of your approach somewhere? I'm always interested to hear how people tinker.
It's not very expository, but here's a thread about my portfolio.
Thanks, interesting read

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

Post by LatentStoic » Sun Aug 25, 2019 3:49 pm

Mindful that there are longer references to his work earlier in this thread, I’ll just share that what finally spurred me to create a username and join this community last year was the “That’s ME!” moment I had when I chanced upon Rick Ferri’s signature tag: “The Education of an Index Investor: born in darkness, finds indexing enlightenment, overcomplicates everything, embraces simplicity.”

Put my tick mark in the good enough / satisficer camp.
Aphorism still under construction.

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

Post by nedsaid » Sun Aug 25, 2019 4:16 pm

I make some effort to optimize my portfolio by diversifying across non-correlating volatile asset classes with Equity-like returns, these are mostly sub-classes of the US and International Stock Markets. Such things like US Mid/Small-Cap Value, REITs, International Small-Cap, aggressive funds that use an earnings and price momentum strategy. I even recently dipped my toe into two Liquid Alt funds.

Where I go into the "good enough" camp is in the choice of factor products. I have used Vanguard Small-Cap Value Index ETF and iShares S&P 600 Value Index ETF for my Small Value representation within my portfolio even though there might be "better" Small/Value factor products out there. It seems that "better" is in the eye of the beholder. If your factor product does a reasonable job capturing whatever factors you want to be in, I say close enough. Lots of opinions out there what the "best" factor products are, if they have a 4 or 5 star Morningstar performance record, that is good enough for me.
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Re: A theory of one's general investing mindset: 'Good enough' or 'Optimize'

Post by tadamsmar » Sun Aug 25, 2019 4:25 pm

vineviz wrote:
Sun Aug 25, 2019 2:18 pm
I have built a portfolio that simultaneously maximizes expected diversification, minimizes expected expense, has an expected real return greater than or equal to Vanguard Target Retirement 2035 Fund (VTTHX), and has an expected annualized volatility of less than 15%.

I can estimate all the parameters needed to compute each of those metrics, and balance the four criteria as best as I can.

How likely is it that that I'll look back in 15 years and see that the portfolio I've chosen ex ante will have turned out to the one actually produce the best ex post result?

Not very. Have I optimized my chances of getting the best ex post result given my current information and those criteria? I think so.
What is the expected annualized volatility of VTTHX expressed as a percent? Is this expected value greater than 15%?

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

Post by vineviz » Sun Aug 25, 2019 4:28 pm

nps wrote:
Sun Aug 25, 2019 3:26 pm
vineviz wrote:
Sun Aug 25, 2019 8:33 am
afan wrote:
Sun Aug 25, 2019 8:25 am
So many optimizers hold cap weighted index funds not because they have decided that they are good enough but because they do not believe there is reliable evidence that something else is better.
Those sound like the same thing to me.
Want to optimize? Yes/no
Believe I can optimize? Yes/no

They don't sound like the same thing to me.

Are "I want to live forever" and "I believe I can live forever" the same thing?
What distinguishes an optimizer from a satisficer is the behavior of optimizing.

If they don’t optimize, their reasons for that might be interesting but those reasons are ultimately extraneous.
"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 vineviz » Sun Aug 25, 2019 4:57 pm

tadamsmar wrote:
Sun Aug 25, 2019 4:25 pm
What is the expected annualized volatility of VTTHX expressed as a percent? Is this expected value greater than 15%?
My estimate for the next 15 years is an annualized standard deviation of around 10%, though it's important to realize that the glide path of a TDF will likely produce more volatility over the next five years than in the five years after that.
"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 GerryL » Sun Aug 25, 2019 5:06 pm

My motto is "Embrace the good enough."

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

Post by willthrill81 » Sun Aug 25, 2019 5:24 pm

ResearchMed wrote:
Sun Aug 25, 2019 1:05 pm
But it also points out a problem with optimization: What IS the "score" or outcome measure one is aiming to optimize... how is it measured?
That problem exists whether an investor's goal is to satisfice or optimize. There must be evaluative criteria to enable one to know when one's strategy is 'satisficed' or 'optimized'.

The issue of what an investor's evaluative criteria are and should be has come in recent threads. An implicit assumption that we see often is that the single most important evaluative criterion is which strategy will leave the investor with the greatest net terminal wealth (i.e. after fees and taxes), but that assumption quickly breaks down when we see that many, possibly most, investors cannot emotionally tolerate the volatility that accompanies the (theoretical) wealth maximization approach. As such, we see that many investors use non-compensatory decision rules (i.e. certain criteria must be satisfied for a solution to be acceptable), regardless of whether someone else believes that they should or not.
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Re: A theory of one's general investing mindset: 'Good enough' or 'Optimize'

Post by Fallible » Sun Aug 25, 2019 6:00 pm

Seems “good enough” isn’t just for small investors. The late legendary value and market-beating investor Martin Whitman practiced “good enough” investing, according to a recent article from the website “Novel Investor”:
Marty Whitman explained his version of good enough investing in a 1996 shareholder letter. He boiled it down to knowing the limits of his skill and being less active. Once his “safe and cheap” criteria were met, it came down to good enough.
(FWIW, I thought the last two paragraphs were especially interesting, at least from my passive and small investor point of view.)

https://novelinvestor.com/marty-whitman ... investing/
John Bogle on his often bumpy road to low-cost indexing: "When a door closes, if you look long enough and hard enough, if you're strong enough, you'll find a window that opens."

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

Post by tadamsmar » Sun Aug 25, 2019 6:24 pm

Have you optimized the logical relationship between your goal and your portfolio construction process and your metrics?
vineviz wrote:
Sun Aug 25, 2019 2:18 pm
I consider myself to be pretty far toward the "maximizer" end of the spectrum when it comes to retirement portfolio construction, so I'll lay out a condensed version of my criteria as an example.

I have built a portfolio that simultaneously maximizes expected diversification, minimizes expected expense, has an expected real return greater than or equal to Vanguard Target Retirement 2035 Fund (VTTHX), and has an expected annualized volatility of less than 15%.
If you simply invest in VTTHX then you are 100% certain of achieving the goal of "an expected real return greater than or equal to Vanguard Target Retirement 2035 Fund (VTTHX)". You can't do better than that on that particular goal. Not sure what the rest of it is all about, I suspect that you are making your likelihood of reaching that goal less than 100%.
I can estimate all the parameters needed to compute each of those metrics, and balance the four criteria as best as I can.

How likely is it that that I'll look back in 15 years and see that the portfolio I've chosen ex ante will have turned out to the one actually produce the best ex post result?
All four of your criteria are true/false criteria. So, your result relative to your goal is either "true" or "false". You either reach your goal or you don't.

"True" is, of course, the "best" result.

But it seems odd to me for you to refer to this a the "best" result. Did you think there are some shades of grey in there?

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

Post by vineviz » Sun Aug 25, 2019 7:19 pm

tadamsmar wrote:
Sun Aug 25, 2019 6:24 pm
All four of your criteria are true/false criteria. So, your result relative to your goal is either "true" or "false". You either reach your goal or you don't.
I suppose you could view it that way, but I don't think it helps add insight. The practical reality is that the first two criteria are never simultaneously "true", so the optimization is an attempt at maximizing some function of those two criteria while ensuring the last two criteria aren't violated.

Anyway, it's a caricature example meant to illustrate the concept. Don't get too hung up on the details.
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Re: A theory of one's general investing mindset: 'Good enough' or 'Optimize'

Post by Rowan Oak » Sun Aug 25, 2019 7:33 pm

I think the word optimize implies that there is room for improvement. I got to a point that I realized "good enough" is the optimal portfolio for me and in the long run will probably outperform the portfolio that is always in some state of optimization. After many years of investing having spent the early years "optimizing" my portfolio I realized simplicity (buy and hold, low cost, total market index funds) and "good enough" would be the best I can do. I am biased though. I don't want to waste time worrying about the things I can't change. It took a long time to finally accept I can't do better than the market return. I am now fully optimized.
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Re: A theory of one's general investing mindset: 'Good enough' or 'Optimize'

Post by tadamsmar » Sun Aug 25, 2019 8:09 pm

vineviz wrote:
Sun Aug 25, 2019 7:19 pm
tadamsmar wrote:
Sun Aug 25, 2019 6:24 pm
All four of your criteria are true/false criteria. So, your result relative to your goal is either "true" or "false". You either reach your goal or you don't.
I suppose you could view it that way, but I don't think it helps add insight. The practical reality is that the first two criteria are never simultaneously "true", so the optimization is an attempt at maximizing some function of those two criteria while ensuring the last two criteria aren't violated.
Your right! The only possible result is "false". Therefore there is only one possible result. Therefore it is a 100% sure thing that you will look back in 15 years and find that you have produced the best possible result! :sharebeer

(The insight I want to help add is that one has to get the logic right.)
Anyway, it's a caricature example meant to illustrate the concept. Don't get too hung up on the details.
I personally don't think you even managed to satisfice illustration, but less optimize it.

But the optimizers here typically satisfice. If you roughly and imperfectly aim at something approximating VTTHX performance, your results will be good enough.

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

Post by PhilosophyAndrew » Sun Aug 25, 2019 8:33 pm

OP, I agree that this is a significant topic for Bogleheads, not least because a fruitless quest to optimize can lead to un-Bogleheadish complexity.

Andy.

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

Post by Lee_WSP » Sun Aug 25, 2019 8:40 pm

I think the term optimizer has the implication that there is some "free lunch" to be gained if one only put in the effort to make it happen. I am a firm believer in "no risk, no reward" or as Bruce Arians put it, "no riskit, no biscuit".

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

Post by Random Musings » Sun Aug 25, 2019 8:44 pm

I'm a good e'nuf investor. Hard to optimize when the efficient frontier is always moving and you are trying to figure out where it will be in the future based on a starting point of now.

I focus on Asset allocation to match desired need of risk, low portfolio cost structure, tax efficiency and estate planning for my heirs. I can't control the ebb and flow of the markets.

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

Post by Rowan Oak » Sun Aug 25, 2019 9:00 pm

vineviz wrote:
Sat Aug 24, 2019 8:32 pm
Beating an index over time is actually pretty easy if you're willing to take on more risk than the index takes and able to be patient with your strategy.
Beating an index over time is actually very difficult even if you're willing to take on more risk than the index takes and able to be patient with your strategy.
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Re: A theory of one's general investing mindset: 'Good enough' or 'Optimize'

Post by EnjoyIt » Sun Aug 25, 2019 9:03 pm

Rowan Oak wrote:
Sun Aug 25, 2019 7:33 pm
I think the word optimize implies that there is room for improvement. I got to a point that I realized "good enough" is the optimal portfolio for me and in the long run will probably outperform the portfolio that is always in some state of optimization. After many years of investing having spent the early years "optimizing" my portfolio I realized simplicity (buy and hold, low cost, total market index funds) and "good enough" would be the best I can do. I am biased though. I don't want to waste time worrying about the things I can't change. It took a long time to finally accept I can't do better than the market return. I am now fully optimized.
It takes some serious self reflection to realize all those years of trying to be smart was for naught. Most people never achieve such enlightenment. Congratulations.

Many smart people have attempted to optimize tinker in the name of optimization only to find out years later if they did nothing they would have been far better off. Sometimes simplicity is maximum optimization.

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

Post by fortfun » Sun Aug 25, 2019 9:13 pm

If we had access to low fee TDFs across all of our retirement plans, that's what I would choose at this point. Sadly, DWs work has picked the expensive Fidelity TDF and won't consider the low fee indexed TDF. So, we are on the 3 fund, which is kind of a pain. We do not rebalance like we should.

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

Post by willthrill81 » Sun Aug 25, 2019 9:53 pm

Rowan Oak wrote:
Sun Aug 25, 2019 9:00 pm
vineviz wrote:
Sat Aug 24, 2019 8:32 pm
Beating an index over time is actually pretty easy if you're willing to take on more risk than the index takes and able to be patient with your strategy.
Beating an index over time is actually very difficult even if you're willing to take on more risk than the index takes and able to be patient with your strategy.
If you take on more compensated risk than the index, then logically you should earn a higher return than the index over the long-term. That's something that even a firm believer in the efficient market hypothesis will (generally) agree to. You're just 'dialing up' risk on the risk-adjusted return spectrum. What they will generally not agree to is that it's possible to take on no more risk than the index and earn a higher return (i.e. earn a higher risk-adjusted return than the index).
“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 telemark » Sun Aug 25, 2019 11:43 pm

As someone who used to work on engineering problems, I definitely fall into the "good enough" camp, which leads me to conclude that if you get the stock/bond mix right and are reasonably diversified, the other decisions are neither determinable nor likely to matter much. I don't feel a need for extreme simplicity. Moderate simplicity is, well, good enough for me.

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

Post by james22 » Mon Aug 26, 2019 1:16 am

Lee_WSP wrote:
Sun Aug 25, 2019 8:40 pm
I think the term optimizer has the implication that there is some "free lunch" to be gained if one only put in the effort to make it happen. I am a firm believer in "no risk, no reward" or as Bruce Arians put it, "no riskit, no biscuit".
Satisficers too believe there is a relationship between effort and reward, they just believe diminished returns come earlier.

Certainly you believe the effort to become a better educated Boglehead is rewarded, yes?

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

Post by ThankYouJack » Mon Aug 26, 2019 7:31 am

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'.
I'm curious how long were you in the good enough camp and why and when your mindset shifted?

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

Post by Rowan Oak » Mon Aug 26, 2019 8:15 am

willthrill81 wrote:
Sun Aug 25, 2019 9:53 pm
Rowan Oak wrote:
Sun Aug 25, 2019 9:00 pm
vineviz wrote:
Sat Aug 24, 2019 8:32 pm
Beating an index over time is actually pretty easy if you're willing to take on more risk than the index takes and able to be patient with your strategy.
Beating an index over time is actually very difficult even if you're willing to take on more risk than the index takes and able to be patient with your strategy.
If you take on more compensated risk than the index, then logically you should earn a higher return than the index over the long-term. That's something that even a firm believer in the efficient market hypothesis will (generally) agree to. You're just 'dialing up' risk on the risk-adjusted return spectrum. What they will generally not agree to is that it's possible to take on no more risk than the index and earn a higher return (i.e. earn a higher risk-adjusted return than the index).
Now add individual investor behavior. It was seemingly logical ideas like these that kept me optimizing complicating my portfolio for years, but then 2000 happened. Then 2008 happened. Then I found a book with much more logic: Common Sense on Mutual Funds.
Invest you must; time is your friend; impulse is your enemy; basic arithmetic works (low costs); stick to simplicity; stay the course.
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Re: A theory of one's general investing mindset: 'Good enough' or 'Optimize'

Post by lostdog » Mon Aug 26, 2019 8:24 am

My engineering mind wants to compulsively tinker. I find I must hold myself back by removing my Vanguard app and only checking my account when I'm adding money.
VTWAX and chill.

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Riley15
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Re: A theory of one's general investing mindset: 'Good enough' or 'Optimize'

Post by Riley15 » Mon Aug 26, 2019 9:34 am

willthrill81 wrote:
Fri Aug 23, 2019 3:34 pm

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.

Thoughts?

I don't think the 3-fund portfolio is the most simplest form on the simple/optimize scale because you still have to decide US/International/Bond allocation and also rebalance as needed which could actually be very complex for some people.

I guess when seeking simplicity there is a "limit" that you reach which would be a Target Date Fund that holds the world stock index fund without any overweight to any one country/region and a fixed income portion that rebalances every day.

The thing with Optimizing is that there is virtually "no limit" to which you can optimize, whatever you're optimizing you can always optimize some more. There's always more information out there that's useful.

In reality I think optimizing is really an illusion because there is no such thing as a optimized portfolio because there will always be another one that beats it in hindsight. It's very likely that after all the time/effort/stress of "optimizing" you end of underperforming the "good enough".

Since you're a trend follower which takes considerable "optimizing" to enter/exit at the appropriate times while in the long run still underperforming the buy-holder.

So a buy-and-holder might regret getting the average returns thinking if he just paid more attention he could have done "better" while the optimizer may actually get below average returns but feel like he really "optimized" everything.

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