The Problem With Complexity

Complexity can be alluring. It can seem that complexity brings potential of higher returns, tax savings, increased flexibility or even reduced risk. Unfortunately, complexity begets itself.

Complexity Breeds Complexity

The problem with complexity is that it breeds complexity. As you bring additional considerations into your investments, those can bring additional problems. For example, let’s say you develop an algorithm that uses moving averages to help mitigate risk of extreme drawdowns. The problem is that it can lead to additional tax implications, so then tax implications need to be considered. Furthermore, when you move in and out of positions, cash can be a drag on returns. What could you do with that cash to optimize this even further? The loop is never ending. Complexity breeds complexity.

The Pareto Principle of Investing

A lot of heuristics really all are similar once you strip them back down to the lowest level. In reality, the below are really all at their core the same:

  1. Law of Diminishing Returns
  2. Parkinson’s Law
  3. The Long Tail
  4. Occam’s Razor

The core is taking care of what is effective. Keep the work minimal. Then stop.

Complexity comes from not stopping. It’s hard to tell where you should be stopping.

To end this with another heuristic, sometimes perfect is the enemy of good. Perfection is unattainable, especially in investing. You can chase it until the day you die, but you will never obtain it. Sometimes the best thing you can do is find a good investing strategy then stop. For every person, their good investing strategy could be different.

P.S. keep it simple stupid (okay – I’m really done with the heuristics now)!

Author: fatbabyfunds