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I’m joined by Ben Carlson to discuss his new book, Risk and Reward, and the trade-offs every investor faces when deciding what to do with their money.
You probably know Ben from his blog, A Wealth of Common Sense, his earlier book by the same name, or the Animal Spirits podcast, which he co-hosts. In this conversation, Ben and I talk about why there is no such thing as an “easy” investment strategy, how investors confuse activity with progress, and why the perfect portfolio only exists with the benefit of hindsight.
We also discuss the illusion of control, the difference between good and bad complexity, the emotional toll of inflation, the challenge of market timing, and why successful investing often comes down to finding a strategy you can actually stick with.
Here are my notes from our conversation…
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There Is No Risk-Free Way to Invest
Ben starts by challenging one of the biggest myths in investing: the idea that there is an easy or risk-free path.
Whether you keep money in cash, buy Treasury bills, invest in index funds, or take big swings in speculative assets, every choice comes with trade-offs. Sitting in cash may feel safe, but inflation can erode purchasing power. Owning stocks offers higher long-term expected returns, but comes with volatility and painful drawdowns.
As Ben explains, the point is not to find a strategy that avoids risk altogether. It is to understand which risks you are taking and whether you can live with them when the strategy inevitably stops working for a period of time.
Why More Effort Does Not Always Lead to Better Investment Results
In most areas of life, effort tends to improve outcomes. Practice an instrument and you get better. Study harder and your grades may improve. Exercise consistently and you can see physical progress.
Investing does not work that way.
Ben explains that markets are filled with smart, well-resourced participants. Information that once required real effort to uncover is now widely available almost instantly. That creates an uncomfortable reality for investors: trying harder does not automatically lead to better results.
We talk about the “bias toward action,” where investors feel compelled to do something simply because doing nothing feels irresponsible. But as Ben notes, today’s low barriers to entry make this temptation even stronger. No trading commissions, easy access to ETFs, and the ability to trade from a phone have made investing more convenient than ever, but they have also made it easier to overreact.
The Difference Between Simplicity and Oversimplification
A simple portfolio can be powerful, but Ben and I discuss why simplicity should not be confused with owning the fewest possible investments.
For some investors, a single fund may be perfectly reasonable. But for others, especially those with taxable accounts, withdrawal needs, concentrated positions, or more complex planning situations, a little complexity can create valuable flexibility.
Ben points out that one-fund portfolios can reduce optionality. If everything is bundled together, it becomes harder to rebalance intentionally, manage taxes, or draw from specific parts of the portfolio when markets are down.
The key distinction is between useful complexity and unnecessary complexity. Useful complexity serves a purpose. It improves flexibility, tax efficiency, risk management, or implementation. Bad complexity exists because it looks sophisticated or gives investors the feeling that more moving parts must mean a better plan.
Why Investors Misunderstand Both Markets and Themselves
I ask Ben whether investors more often misunderstand the markets or misunderstand themselves.
His answer is that both can be true, especially for people who follow markets casually. A little knowledge can sometimes lead investors to get in over their heads. Complexity becomes especially dangerous when investors do not understand what they own well enough to stick with it during difficult periods.
That is one reason simple strategies can be easier to rebalance into when they are struggling. If an investor understands why they own an index fund, they may be more willing to buy more when it is down. But if they own a complex hedge fund, private investment, or discretionary strategy, poor performance often creates doubt about whether the strategy is broken.
Ben captures the point with a memorable line: no index fund has ever shut down because it is going through a divorce and needs to spend more time with its family.
Loss Aversion and the Stories That Make Volatility Feel Worse
The conversation then turns to one of the central behavioral challenges of investing: loss aversion.
It is easy to look at historical bear markets and say you could have handled them. It is much harder to live through one in real time, when a 20% decline might become 30%, 40%, or 50%.
See – EP.193: Why Watching The Market Hurts Your Return (And How to Stop)
Ben argues that the classic advice to “ignore the noise” is no longer realistic. Investors are surrounded by headlines, opinions, social media, and constant market updates. Rather than pretending the noise does not exist, investors need better filters.
Those filters might include rules for what they will and will not invest in, an advisor who acts as a behavioral guardrail, or a clear philosophy that prevents every new product or scary headline from becoming a portfolio decision.
I also point out that many investors are not reacting to volatility itself as much as the story attached to the volatility. The market decline becomes frightening because of the narrative surrounding it.
Why Market Timing Requires Being Right Twice
Few phrases sound more reasonable in the moment than “let’s just wait for the dust to settle.” But Ben explains why market timing is so difficult: you have to be right twice.
Getting out before a decline is only the first decision. Getting back in is often harder.
Ben shares stories of investors who sold during the financial crisis and avoided some of the worst losses, only to remain out of the market for years. The exit felt good in the moment. But the re-entry decision became psychologically overwhelming as markets recovered before the economy or headlines felt safe.
The market does not wait for the all-clear signal. Stocks often bottom before earnings recover, before unemployment improves, and before the news feels better. That makes “getting back in when things feel safe” a dangerous plan.
Lessons from the Great Financial Crisis
Ben and I both started our careers before the financial crisis became the defining bear market of our professional lives.
Ben recalls the overwhelming pessimism that followed the crash. Many institutions wanted to move into hedge funds and black swan strategies after the market had already fallen nearly 60%. Yet history suggested that lower prices, lower valuations, and higher dividend yields could set the stage for better future returns.
I mention that the all-clear signal never really arrived. Investors worried about European debt, a double-dip recession, U.S. debt, and a range of other risks long after the market bottomed.
That experience shaped how both of us think about subsequent bear markets. It also reinforced the value of studying market history and documenting what you believe in real time, rather than rewriting your own memory after the fact.
Inflation as an Emotional and Financial Risk
Inflation is one of the most important long-term risks investors face, but Ben emphasizes that the psychological toll of inflation is easy to underestimate.
After decades of relatively low inflation, the recent rise in prices felt especially painful. Even when the rate of inflation comes back down, the earlier price increases remain. People may want 2019 prices back, but they generally do not want 2019 wages back.
Ben explains that inflation feels a lot like loss aversion. People notice rising prices intensely, but they do not always connect those higher prices to higher wages or broader economic growth.
For investors, the lesson is clear: one of the primary reasons to invest is to preserve and grow purchasing power over time. Cash may feel safe in the short run, but inflation makes it risky over long periods.
Why Markets Are Complex Adaptive Systems
Ben and I then discuss markets as complex adaptive systems.
Ben notes that markets today are more interconnected, more financialized, and more important to everyday households than they were decades ago. More people own stocks through 401(k)s, IRAs, and taxable accounts. Financial markets are now deeply tied to the broader economy.
I share the analogy of a sandpile. As grains of sand fall onto a pile, small cascades and large avalanches can occur, but the exact timing and size are impossible to predict. Each grain interacts with the others in ways that make the system unpredictable.
Markets work in a similar way. Even if you know every individual fact, you still may not be able to predict how all those facts interact. The whole is greater than the sum of its parts.
That is why hindsight can be so misleading. Once an event occurs, it feels obvious. But in real time, there are countless possible futures.
Long-Term Investing Requires Optimism Without Blindness
I’ve always believed that long-term investing is, in many ways, an act of optimism. Not blind optimism, but evidence-based optimism.
The future is unknowable. The best investors do not pretend otherwise. Instead, they rely on probabilities, base rates, and a clear understanding of which risks have historically been rewarded over time.
Ben makes a similar point about economic headlines. Even if someone gave you the future headlines in advance, you might still fail to profit from them because the market’s reaction is not obvious. During COVID, for example, the unemployment rate spiked, people were confined to their homes, and the economy seemed poised for a long downturn. Yet the market recovered far faster than many would have expected.
Knowing what will happen is not the same as knowing how markets will respond.
The Perfect Portfolio Only Exists in Hindsight
Ben and I close with a discussion of the “perfect portfolio.”
Ben explains that highly optimized backtests often fail because they do not account for real human behavior. A strategy that looks perfect in a spreadsheet may be impossible to stick with in real life.
The best portfolio is not necessarily the one with the highest theoretical return or the most elegant optimization. It is the one an investor can actually live with through market cycles, bad headlines, regret, boredom, and fear.
For some people, that may mean a simple, low-cost, globally diversified portfolio. For others, it may mean allowing a small “release valve” where they can trade individual stocks or take small risks without disrupting the rest of the plan.
The lesson is not that anything goes. It is that behavior matters. A good enough portfolio that an investor can stick with is often better than a theoretically perfect portfolio they abandon at the wrong time.
Key Takeaways
- Successful investing is not about avoiding risk. It is about choosing which risks you are willing and able to live with.
- Simple portfolios often work because they are easier to understand, explain, and maintain during difficult markets.
- More effort does not necessarily produce better investment results. In many cases, the hardest thing to do is nothing.
- Complexity can be valuable when it serves a clear purpose, but it becomes dangerous when investors do not understand why they own something or how it might behave.
- Market timing is difficult because it requires two correct decisions: when to get out and when to get back in.
- Inflation is both a financial risk and an emotional one because people feel price increases more intensely than many other economic changes.
- The perfect portfolio cannot be known in advance. A durable portfolio is one that aligns with an investor’s goals, temperament, and ability to stay invested.
Resources:
- Ben Carlson’s blog: A Wealth of Common Sense
- Ben’s podcast: Animal Spirits
- Ben’s book: Risk and Reward
- My upcoming book: The Perfect Portfolio
The Long Term Investor audio is edited by the team at The Podcast Consultant
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