Why Perfectionism Ruins Portfolios

Perfectionism is an obsession with flawless performance. In data-driven fields like investing, the push for perfection is constant. This post explains why searching for the perfect strategy can be a waste of time and how short-term dopamine spikes can sabotage long-term investment decisions.

The Lure of Investment Marketing

Investors chase perfection because they are told it's achievable. Some fund managers support this narrative with marketing that suggests better returns are just one click away. For example, who doesn't feel a pull toward aggressive strategies when markets only seem to go up? Or the desire for defensive hedges in the middle of a crash?

Past performance and well-timed presentations only create the illusion of certainty about the future. Instead of a crystal ball, investment marketing is closer in nature to old-school advertising:

• Cherry-picked data? Check.
• Suggestion of future benefits? Check.
• Lack of long-term evidence? Check!

Investing success is not about finding the perfect portfolio. Meb Faber revealed that even if someone could have predicted the top performing strategies in advance, paying high fees would have transformed the best into the worst.

Investors cannot predict which portfolio is optimal for an unknowable future. But you can reduce fees to ensure you capture a larger share of future returns.

"Fund fees are the most proven predictor of future returns." - Morningstar

I used to think the solution to a complex financial landscape was more. More articles, more books, and more videos. Every morning I added to a file thinking it was getting me closer to investment perfection:

It took me far too long to realize smart investing is not about addition, but subtraction. Less fees. Less funds. Less buying into marketing bullshit.

The ability of bad actors to steal your attention is greater than your ability to filter their endless flow of content.

That’s why one shortcut to more focused thinking is unsubscribing and unfollowing. Don't think of it as a loss of information, but rather a guaranteed recovery of your time.

Chasing (All-Time) Highs

Dopamine cycles predispose us to portfolio dissatisfaction. Thousands of years ago, the ebbs and flows of this neurotransmitter motivated us to search for scarce resources. But does it help us make smart investment decisions today?

"When we expect something to happen, we are highly motivated to pursue it. The key is not to chase high levels of dopamine when we participate in certain activities." - Dr. Andrew Huberman

Some financial companies, like casinos, are experts at engineering products to hijack our biology. Dopamine is not about pleasure. It's about the anticipation of pleasure. Nothing revs up an investor's anticipation like a convincing story or recent performance.

Robert Sapolsky researched what happens to dopamine in environments with unpredictable rewards:

"Dopamine goes through the roof. A critical word gets inserted in your neurochemistry: maybe. Nothing fuels dopamine like maybe. Being on the edge of today being your lucky day drives reward-related behavior."

Short-term investment outcomes are a coin toss. This low predictability makes financial decisions especially vulnerable to a dopamine rush derailing our judgement.

Next time you stumble across an investment strategy that feels like a sure thing... remember it's likely the dopamine talking. You don't have to listen, because it will never get satisfied.

The Cost of Perfectionism in an Imperfect World

Morningstar research shows that investor returns are often lower than the returns of funds they own. One explanation for this phenomenon is that people chase performance, buying after strong returns, then selling after weak returns.

This return gap is even wider in alternative and sector funds, two areas rife with alluring stories. Which is more likely to trigger that anticipatory dopamine rush: a stale PDF on a diversified total market fund or a video on why now is the perfect time to buy a natural gas ETF?

Institutional investors managing billions are not immune from chasing performance. Like retail investors, they often look in the rear-view mirror and buy what they wish they owned years ago:

Along with lower returns, perfectionism can also damage your health. Hundreds of studies link perfectionism with increased anxiety and depression. Both of which lead to shorter lifespans.

Portfolio perfectionism steals time from friends, family, and meaningful activities that you have control over (unlike market returns). Top Five Regrets of the Dying reveals what one nurse heard thousands of patients share during their last days. “I regret my portfolio’s return was not 1% higher” did not make the list.

Summary

• Missing out on investment fads is a feature, not flaw, of diversification.
• Instead of chasing short-term dopamine highs, build a portfolio around a short list of evidence-based rules.
• Exercise the discipline to follow those rules. Successful investors reduce fees and stick to something imperfect rather than endlessly pursue perfection.