6.2.3 The Danger of Over-Optimisation

Why the search for a perfect strategy tends to backfire

Continuously searching for a marginally better fund, a marginally better factor combination, or a marginally better market-timing signal generally means more frequent switching, more transaction costs incurred along the way, and more opportunities for a costly behavioural mistake to creep in at exactly the wrong moment. The theoretical benefit of finding a genuinely, meaningfully better strategy is very often smaller in practice than the real, tangible cost of the constant searching and switching itself.

Why good-enough so often wins out in actual practice

A simple, well-diversified, low-cost portfolio, held with reasonable patience through a full market cycle, has repeatedly outperformed far more complex, frequently adjusted strategies once all the real-world costs and behavioural mistakes involved in that added complexity are properly and honestly accounted for. Simplicity itself has genuine, measurable value that is easy to underestimate in advance.

How to recognise this pattern in your own investing behaviour

If you find yourself frequently switching funds chasing whichever one performed best most recently, or constantly researching an ever more elaborate strategy without any of the previous versions ever quite feeling finished or settled, that pattern itself is often a more useful and telling signal than whatever specific improvement you happen to currently be chasing.