The Most Common Mistakes Investors Make

By Geoff Schaefer

Geoff is a Wealth Advisor with Intergy Private Wealth. He writes for The Steadfast Fiduciary to help people live with an abundant heart, open mind, and boundless generosity.

December 12, 2023

There are many technical and mathematical parts of investing.  Compound interest, expense ratios, dividend yields, various risk measurements, all of which are very important.  However, what actually determines what kind of returns we, as individual investors will see, is our own behavior. Our ability to navigate the markets and our financial plans with grace and determination are key to the long-term success of our portfolios.  So, what are some of the most common mistakes investors make? These mistakes apply to investors that have been in the markets for 30 years all the way to someone who just opened their first 401(k). They are not professional or amateur mistakes; they are human mistakes.

Here is a list of 10 of the most common:

  1. Timing the market:

“Far more money has been lost by investors trying to anticipate corrections, than lost in the corrections themselves.” – Peter Lynch

This is one of the biggest issues I regularly see.

“I just don’t know if we can invest with the economy the way it is.”

“Let’s wait until the market recovers a little bit from here.”

“With the election coming up, the market will surely go up/ down from here.”

“What about China?  Not a good time to invest with them doing what they do.”

All of these are attempts to rationalize your decision to time the market. None of them are good. While they may sound rational, the stock market is not. Stocks can go for long periods with little to no movement followed by short periods of much gain. 2023 was a good example of that- January through October saw a total return of just under 10%. Not bad and a lot of recovery from a bad 2022.  In November alone, that total return doubled to over 20%.  Missing a month in the market cut out half your investment return for the year. A lot of study has gone into this. In fact, going back to 2003, missing the best 10 trading days cut your total return in half. Missing the best 60 days in a 20-year period dropped your total return by 93%!! Time in the market matters, not the timing.

“If you think the market’s ‘too high’ wait ’til you see it 20 years from now.”-Nick Murray

2. Thinking stockpicking will outperform the market:

For most investors, picking individual stocks is a foolhardy errand. Deciding you believe the strongest several hundred companies in the world will continue to grow, innovate, and earn is far different than making the same assumption about a single company. An individual stock poses a potential for great returns and with that presents the risk of more severe losses.  Very simply, in a group of 100 companies, if 5% go out of business, 95% are still making money.  In a single company, you get 100% or 0%, nothing in between. You give yourself a chance to make some great returns by picking a few individual stocks, but history shows most of us will underperform the market as a whole.  Jack Bogle famously said, “Don’t look for the needle in the haystack. Just buy the haystack!”

Read more here for my case for diversification: A Case for Diversification

3. Watching their investments too much:

The best investors forget their 401(k) passwords. That is said somewhat in jest, but if you have put a good investment plan in place, there is no reason to look at your portfolio daily. If you are self-managing it, perhaps twice a month is appropriate.  If you’ve outsourced management, once every six months is fine.  You may only wanted to check once a year, and that would be just fine as well.  The point here is your investment portfolio is not the entirety of your financial plan.  I know some financial firms make it the sole focus, and it is admittedly the more exciting aspects of financial planning, but all the same, your portfolio performance in a given week (assuming a well-constructed diversified portfolio) does not matter.

As humans, we feel the pain of loss nearly twice as much as the joy of an equal sized gain. Since 1951, the market has dropped over 46% of individual trading days.  Checking daily will have made you twice as unhappy about your portfolio since 1951 even though you averaged a 10.9% return over that period and a $100 investment would be worth $195,543.

              The sooner you can push checking your portfolio, from daily, to weekly, to monthly, the happier investor you will be.

“Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas.” – Paul Samuelson

4. Attempting to build a perfect portfolio:

“A good plan, violently executed now, is better than a perfect plan next week” — George Patton

In investing, the enemy of good is perfect. It is highly likely that the difference in XYZ large cap fund and ABC large cap fund is negligible. In the late 80s, a famous study was conducted that concluded that asset allocation explained nearly 92% of a portfolio’s return and the remainder was a result of security selection and market timing.

All that to say, if your financial plan can help you determine what is the appropriate asset allocation and you work with a professional to ensure you are in high quality low-cost investments, there is little reason to spend time making something that is very good, perfect.  In fact, it is the nature of the market to turn perfect into good without warning. Instead of comparing a 1% holdings difference or the expense ratio difference of .01%, invest in your good portfolio confidently and move on. Bruce Lee said, “If you spend too much time thinking about a thing, you’ll never get it done.”  The investment management world has given the illusion to investors that without “the perfect portfolio” long term financial success cannot be obtained.  In my experience, a client’s goals and investment policy statement could be met several ways and still have the same risk, return opportunity and likely outcome. There is no single perfect way to accomplish anything. Investing is no different. When To Start My Financial Plan

5. Watching too much news:

“The function of economic forecasting is to make astrology look respectable.”- John Kenneth Galbraith

This one is pervasive and probably one of the easiest to fall into.  I wrote a whole piece a while back on the struggle for our attention and the mindfulness we must practice with the news.  Read more here: Media Battle for Our Attention

The media has one agenda, your views/ clicks.  Whatever your chosen news outlet, no matter how much you appreciate and trust them, simply want you to watch through the commercial break so Pepsi, Disney, US Gold IRA, Focus Factor, and the NFL can all write them checks. Watch enough to stay informed. When the news starts affecting how you feel or changing your perception about your portfolio, shut it down. No news is good news and I promise, if something matters enough, you will hear about it everywhere.  Whatever Senator “what’s her face” said about Representative “What’s his name” is not helping anyone, anywhere.

6. Focusing too much (or not enough) on taxes:

“More investment sins are probably committed by otherwise quite intelligent people because of “tax considerations” than from any other cause.”-Warren Buffett

Taxes are important. They are a significant part of planning and a huge value-add I bring to my clients. When faced with a planning and investment decision, prioritize your life, plan, and values first. After that, factor in the taxes. Do not let the tax tail wag the financial plan’s dog. Good tax planning while investing is asset location: the placement of income tax heavy investments like REITS, Corporate Bonds, and Dividend Stocks in qualified retirement accounts. Growth stocks, Muni bonds and cash can all sit in taxable accounts. This seems simple, but 1) does not affect the overall financial plan and 2) can save a lot in taxes over time.  An example of letting taxes cripple an investment decision is not moving on from a specific investment because you do not want to pay capital gains. Develop a financial plan, an investment policy statement, and then tax plan accordingly.

On the flip side, it is important to take taxes into account when investing and planning.  Proper asset location, tax loss harvesting, direct index and ETF investing are all tax smart moves one can make.

7. Chasing yield:

“More money has been lost reaching for yield than at the point of a gun.” – Raymond DeVoe Jr.

Yield is great! It can come from interest or dividends. It is also only part of your overall portfolio return. Becoming fixated on only yield can cause you to drift into lower quality investments over time. Why is that? Where there is more yield, there is more risk. I’m not talking about what you get in a savings account or CD as that is all controlled by actions from the Federal Reserve. Those action do trickle down to other segments of investing.  Let’s say you want to buy a bond.  Company A and B both have strong cash flows. Company A currently has 1% of it’s annual income servicing debt.  Company B has 40% of its income paying for current debt.  If both companies offered to sell you bonds paying 6%, which one would you choose?  Obviously, Company A! Why? Because most of the income Company A is making is going back into the company, wile company B is using nearly half of it’s income just to pay for debt. What would make you choose Company B?  Perhaps if they increased their yield offer from 6% to 14%?  At that point, we’d strongly consider taking on the debt of B. This is the case with most yield scenarios.  In stocks, yields are all based on stock price.  If a stock price is tanking, the yield will increase by default.  You may not want to catch the falling knife of certain stocks, but yield chasing will lead to that.  Real estate, private credit, peer to peer lending, all operate under the same premise.  The yield is there due to increased risk. Risk and reward are attached when investing- allocate accordingly.

8. Not understanding risk:

“You get recessions, you have stock market declines. If you don’t understand that’s going to happen, then you’re not ready, you won’t do well in the markets.” — Peter Lynch

Which leads directly to the next mistake investors make: Not understanding risk. When you invest whether it is in cash, bonds, stocks, or some sort of alternative, there is an immediate trade off of risk, return and liquidity. Too often, investors think about the liquidity and the return potential, but not the risk. We will pick on a simple index- the S&P 500. As we established earlier, we’ve earned about 11% a year since 1951. However, buying into the fund assuming that you have opted into an 11% escalator is a fantastic misunderstanding of risk in the stock market. In fact, only two years of returns can be rounded to the 11% average in a 72-year period. A lot of double digit negatives and positives took place to land you at that cushy average. Where there is a potential for return, there is possibility for risk.  If both are not amply clear, some more understanding of your investment strategy may be required.

9. Not controlling what you can control:

“All financial success comes from acting on a plan. A lot of financial failure comes from reacting to the market.”- Nick Murray

In life, we control surprisingly little of the world around us.  The weather, the president, foreign policy in Asia, which teams make it into the College Football Playoff… all 100% out of our control.  This obvious slap in the face concept seems simple, but we somehow let out opinions on those things slip into our decision making process. Let’s say for your retirement plan to succeed, you should allocate three years of your expenses in cash and the remainder in a 80% stock/ 20% bond portfolio. You read about AI and how it will transform the world and how the upcoming election will usher in a new era of tech, so you convince yourself to go down to one year’s worth of expense in cash and invest the difference in tech stocks.  That may play out really well or may set you back significantly, but either way, you are making important investment decisions based on outcomes you have zero control over. Invest monthly, allocate appropriately, choose fairly priced funds, tax loss harvest, invest windfalls when you have them, control what you can control. 

10. Forgetting to set clear purpose and values:

“But in the end, financial decisions aren’t about getting rich. They’re about getting what you want—getting happy.” ― Carl Richards

Perhaps the most important- What the heck are we doing all of this for?  What really matters to you?  What values do you and your family hold dear?  Investments are a way of stewarding our money and having it work for us over time. We will grow wealthy with our investment strategy, but the point is not to simply be rich.  Make a unique statement for your investments. It should be a non-technical/ no jargon way of reminding you why you invest in the first place.  “I want to live a life of flexibility and generosity in a home with space where I can maximize time and memories with my family.” A statement like that takes some of the guess work out of what account you should be saving into.  It provides an anchor in a choppy market. It establishes a vision when the day to day begins to drag you down. The values behind the money will always be worth more than the value of the actual money.

Bonus: Failing to start:

“The Way Get Started Is to Quit Talking And Begin Doing.” — Walt Disney

Whether you are 25 or 65, the best time to start some form of financial plan is yesterday.  Investment planning is part of (not all) of a good financial plan.  Alongside proper insurance planning, budgeting, estate planning, and retirement planning, a good investment plan is key to long term success. Some of your investment plans will revolve around selecting a good portfolio and buying monthly.  Others might be allocating seven figures or more for retirement security and legacy planning.  No matter what, align that action with what you value and get to it.  Automate as much as you can and avoid the pitfalls listed above. With time, you will be amazed at the power of consistent investing and the opportunities you afford yourself because of it. Just start!

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