Behavior #3: Prefer the simple to the complicated

Wealth

Jan 16

The law of diminishing returns, paraphrased: the relationship between effort and results is not 1:1 in perpetuity.

Rather, each unit of additional effort, beyond a set point, returns a fraction of the original result.

This law is obvious when we examine things like the cardiovascular benefits of running; adding a 4th mile to your 3-mile routine run does not return the same improvement in blood stroke volume and attendant health as adding the 1st mile to your 0-mile “routine”.

The same applies to your finances. Once you’ve enacted a few things correctly (such as saving as much as you can and investing that savings in well-diversified, market-tracking index funds), additional efforts are unlikely to yield meaningful additional results. Perhaps more to the point, additional effort in the financial sphere, usually framed as an attempt to “beat the market”, is statistically-likely to be detrimental to your wealth.

Equally as important, complication in your financial strategies will come at the cost of your peace of mind. Constantly shifting allocations to eke out additional return, or undertaking a strategy that requires you to engage in quarterly monitoring of individual companies or macroeconomic factors introduces an attentional toll that creates stress and triggers the very human propensity to “do something now” — buying or selling based on transient phenomenon, thereby unnecessarily interrupting compounding.

Instead, you’ll best serve your net worth and your peace of mind by enacting a simple financial strategy, sticking with it through volatility, and simultaneously developing a very healthy suspicion of anything that even hints at complication.