'A lot' of 'high IQ' people make this investing mistake, says money psychology expert—Warren Buffett agrees on what to do instead

CNBC

2 days ago

It's natural to feel like being a good investor means coming up with a complicated strategy that maximizes returns, Morgan Housel, author of "The Psychology of Money," said on a recent episode of The Burnouts podcast. But that perspective is likely holding you back from long-term financial gains, he said.
"A lot of people in investing, particularly smart people ... high IQ, high educated people, are like, 'Let's try to make this as complicated as we possibly can,' and they do," Housel said. But when it comes to investing, "the more complicated you make it, the worse you're probably going to do."
Instead of chasing hot stocks or trying to time the market, the smartest approach to investing is making it as "brainless and simple and boring as you can," Housel said.
"If you can be an average investor for an above-average period of time, like just earn average market returns every year for the next 20 years, you'll do amazing," Housel said. "The simple people who can be simple and average for 50 years are the ones who end up doing the best."
One of the best tools for this approach is a low-cost index fund, which tracks a market index like the S&P 500 and aims to replicate its performance.
Considering that even the world's most seasoned money managers struggle to consistently beat their benchmark indexes, investing to merely keep pace with the market is a savvy, low-effort approach, says Ben Smith, a certified financial planner and founder of Cove Financial Planning in Milwaukee, Wisconsin.
It might feel more exciting to try to chase the highest returns possible, but chances are, that probably won't get you closer to your long-term goals than staying consistent with a low-cost index fund, he says.
"I kind of joke to my clients, if investing is fun and sexy, you're probably doing something wrong," Smith says. "It should be kind of boring, it should be pretty easy ... You don't have to pick and choose different stocks and be really strategic, because that often doesn't work out very well, at least for most investors."
Data indicates the same: Between January 2015 and December 2024, only 7% of active mutual fund managers beat their average passive rival, according to Morningstar.
Warren Buffett, chairman of Berkshire Hathaway and one of the world's most successful stock market investors, has long been a proponent of passive investing. In a 1993 letter to shareholders, he wrote, "by periodically investing in an index fund ... the know-nothing investor can actually outperform most investment professionals."
On CNBC's On the Money in 2017, Buffett reiterated similar advice: Most investors shouldn't focus on picking "the right company," he said, but rather they should consistently buy all the big companies through the S&P 500 in a "very, very low-cost way."
Ultimately, owning a diversified portfolio of low-cost index funds, and holding onto them for as long as you can, will make "the most sense practically all of the time," Buffett said.
Smith agrees. Beyond being easier to manage than a collection of individual stocks, index funds and exchange-traded funds enable you to harness the historical upward trend of the market, while reducing the risk that a decline in any single investment could derail your portfolio's returns.
Plus, when you're choosing a strategy that's low-effort and won't pressure you to constantly check the market or second-guess your selections, it'll be easier to stick by your investments for the long haul. To Housel, that's most important for achieving your long-term goals.
"The question you want to ask when investing is not, 'What are the highest returns that I can earn?'" Housel said. Rather, "What returns can I keep going for the longest period of time?"
Of course, it's always smart to check in with your own financial advisor before making any changes to your portfolio.