Quick fixes in investing, as in dieting, rarely work

Humans beings like taking shortcuts. We look for quick fixes and easy solutions, whether it's the latest fad diet or a new cryptocurrency we're told will make us rich. Although, almost invariably, the results are disappointing, we keep on making the same costly mistake, because that's the way our brains have evolved. Is there anything we can do about it?

Most of us have been on a health drive at some stage, and the universal experience is that they’re very hard to maintain. We start with the best intentions to exercise more or eat a healthier diet, but, within a few weeks, or even days, we struggle to keep it up. Bad habits creep in and, before long, we’re back where we started — lounging on the sofa for hours on end and eating all the wrong things.

If it’s any consolation, the pattern just described is perfectly natural. It’s how the human brain has evolved. Our ancestors would have to go for long periods without food, so it was perfectly sensible for them to conserve energy if they didn’t need to expend it and to fill up on our calories whenever the opportunity arose.

In his bestselling book Thinking, Fast and Slow, the Nobel Prize-winning psychologist Daniel Kahneman, who died recently at the age of 90, described what he called a “general law of least effort”, which applies to both cognitive and physical exertion. “The law asserts that if there are several ways of achieving the same goal,” Kahneman wrote, “people will eventually gravitate to the least demanding course of action.” In short, human beings are wired to be lazy and to seek shortcuts.

Investing, like diet and exercise, is a classic example of an activity in which this propensity to laziness and preference for quick fixes can have a detrimental effect on outcomes.

Quick fixes rarely work

Interviewed on Dr Rangan Chatterjee’s Feel Better, Live More podcast, financial author Morgan Housel said: “It’s the exact same in finance as it is with health. People want to be able to eat Cheetos and drink tequila, but if there’s a pill or a supplement I can take that will still make them healthy, that’s what (they) want.

“Investing for the long term works. If you're going to dollar-cost-average into low-cost index funds and hold them for 30 years, that works, and you’ll build a lot of wealth. But it takes some sacrifice. It’s boring and it takes a long time. So people say, ‘What’s the hack? What's the day trading strategy to help me build wealth faster? I don't want to do it in 30 years; I want to do it in 30 weeks.’”

Unfortunately, like the latest fad diets, quick investment hacks rarely work. Of course, you could strike lucky and invest in a particular stock, say, or cryptocurrency, at just the right time, and then get out while the price is high and make a large profit. But the odds are stacked against you. Even if you do succeed, it’s not a sustainable strategy. Sooner or later, your investment performance will revert to the mean, and, inevitably, you’re bound to make bad calls and lose money too.

Professionals suffer too

But it’s not just retail traders and investors who succumb to the urge to seek shortcuts. It also happens to professionals, even doctors. Several studies have highlighted a “rush to prescribe” among GPs and a tendency to reach for the prescription pad when what the patient really needs is, say, a course of long-term counselling or advice on changing their lifestyle.

“When physicians are under time pressure,” Daniel Kahneman wrote, “they are apparently more inclined to choose a quick-fix solution, despite its serious downsides.”

A fascinating paper called Money Doctors, by Nicola Gennaioli, Andrei Shleifer and Robert Vishny, published in 2015, argued that fund managers and investment advisers often act in a similar way.

“Many investors have very little idea of how to invest, just as patients have a very limited idea of how to be treated,” the authors wrote. “And just as doctors guide patients toward treatment… ‘money doctors’ help investors make risky investments and are trusted to do so even when their advice is costly, generic and occasionally self-serving.

“In many circumstances, they have a strong incentive to pander to their investors’ beliefs… In situations in which investor beliefs are misguided and highly correlated across investors, money managers pursue similar strategies that pander to these misguided beliefs.”

Takeaways for investors

What, then, are the takeaways for investors? The most important lesson is never to lose sight of the fact that having a long-term investment strategy is a far more reliable way to achieve your goals than taking shortcuts.

So instead of constantly looking out for investment “opportunities”, stay focussed on your long-term goals, invest for the long term in a broadly diversified portfolio, tune out the noise, and, apart from occasional rebalancing, resist the temptation to make changes.

Bear in mind, too, that other people have a vested interest in tempting you with quick fixes — not least the fund management industry and the financial media. What’s good for them is often bad for you.

Take some time to learn about behavioural psychology, and how our biases, instincts and emotions can stop us achieving good investment outcomes. Watching this video series or reading Thinking, Fast and Slow would be an excellent way to start.

Finally, if you don’t already have one, engage with a financial planner with a thorough understanding of behavioural finance, who can help you identify your behavioural blind spots, and who can keep you on track if you’re ever tempted to change course or make irrational decisions.

Remember, successful investing isn’t a one-hundred-metre sprint. It’s more like training for a marathon. For you to succeed, it’s going to entail focus, sacrifice and discipline, and, crucially, sustaining it over a very long period of time. Having a coach, in the form of an adviser, to help you keep your eyes on the prize could make all the difference.