By Dr. James M. Dahle, WCI Founder
It’s a funny quirk of human nature that we learn more from bad experiences and examples than we do from good ones. Today, let’s talk about 35 signs that you are not a very good investor.
How to Know You Are Terrible at Investing
If you recognize yourself in any of these examples, see what you can do to correct the problem.
#1 You Think You Can Beat the Market
If you could truly pick stocks well enough to trounce an index fund, you should be a billionaire and you should be managing billions of other people’s money—not your own little six- or seven-figure portfolio. If you own individual stocks but don’t realize you are almost surely hurting your return by doing so, you’re fooling yourself.
#2 You Think You Can Pick Someone Else That Can Beat the Market
The fact that there is still money in actively managed mutual funds is one of the greatest examples of the triumph of hope over experience. Over the last 20 years, nine out of 10 mutual funds have underperformed the market. Before tax. And no, they’re not the same funds that did it the prior 10 or 20 years. There is no persistence. Of the funds that beat the market in 2019, only 77% beat the market in 2020 and only 7% beat the market in 2021.
#3 You Chase Performance
You own a portfolio composed of the assets that did the best last year, a recipe for chronic underperformance due to the lack of persistence among asset classes and investment managers.
#4 You Buy Investments Designed to Be Sold
Loaded mutual funds and commissioned insurance products, such as variable annuities and whole life insurance, are designed to be sold, not bought. They don’t have a place in a real portfolio. They just show up in the portfolios of investors who have mistaken a financial salesperson for an advisor.
#5 You Buy Long-Term Investments with Short-Term Money
Putting your emergency fund or that down payment money into stocks, real estate, or other investments designed for the long term is a rookie error. If the volatility doesn’t eventually get you, the illiquidity will. Sometimes, the return of your principal matters more than the return on your principal.
#6 You Don’t Use Retirement Accounts
There are precious few free lunches in investing. One of the biggest ones is the use of retirement accounts to reduce taxes, protect assets, and facilitate estate planning.
#7 You Pay Too Much for Advice and Assistance
One percent per year of a $300,000 portfolio ($3,000) is a very reasonable price for financial planning and investment management. One percent per year of a $5 million portfolio ($50,000) is not.
#8 You Think Your Investments Care About Your Politics
The futility of ESG investing on changing the world is well-known, yet the trend toward it continues. You (and your favorite causes) are generally better off investing primarily to make money and then using the money to do good in the world instead of trying to do good through your investments. Plus, the market doesn’t care that your Facebook group thinks the world will go to hell in a handbasket if your least favorite politician wins the election. As Mark Twain said, “It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.”
#9 You Only Focus on Nominal Returns
The only return that matters in the long run is your after-tax, after-fee, after-inflation return. Learn to think about money in inflation-adjusted terms.
#10 Lack of a Written Investing Plan
Your brain space is limited, like all of ours. Write down your investing plan and the reasons for it. This will help you see the gaps in your knowledge, and it will help you avoid changing it at the worst possible moment.
#11 You Cannot Explain Your Portfolio in 30 Seconds or Less
My portfolio is composed of 60% stocks, 20% bonds, and 20% real estate. Do you even know what your asset allocation is?
#12 You Don’t Realize That the Investor Matters More Than the Investment
Your behavior as an investor will have a much larger impact on your investment returns than the particular investment that you select.
#13 You Think Investing Is Exciting
Successful investing is boring investing. If you talk about it like it’s something exciting, using fancy financial terms you may not even understand, successful investors may smile and nod their heads. But inside they’re mocking you.
#14 You Never Rebalance
Buy, hold, and rebalance. Don’t forget that third step. It’s an important piece of risk control, and controlling risk matters a lot more in investing than chasing returns.
#15 You Know Your Rate of Return, but Not Your Savings Rate
Great investors are first great savers. It doesn’t matter what the return on a tiny little portfolio is. Especially in the early years, focus more on making more money and saving a bigger chunk of it and less on maximizing that investment return.
#16 You Don’t Even Know Your Rate of Return
I find it amazing how few investors know how to actually calculate their investing return.
#17 You Look at Your Portfolio More Than You Mow Your Lawn
Investments make most of their money when you’re not looking. So, look less. It doesn’t help to look more, and it could hurt you.
#18 You Are Attracted to Investments That Promise Returns That Are Too Good to Be True
Yes, we’d all like to earn 40% a year. But do you realize that if you have a million dollars and earn 40% a year, you will own the entire world in just 59 years? You’ll be a billionaire in just 20 years. There are only 2,700 billionaires in the world. That tells you that you shouldn’t expect any sort of long-term 40% return. That’s too good to be true. People telling you to expect that are lying and are probably trying to steal from you.
#19 You Buy Primarily Speculative Investments
If the investment you buy has no earnings, pays no rents, and pays no interest, limit it to a single-digit percentage of your portfolio—if you invest in it at all. This includes precious metals, commodities, empty land, and crypto.
#20 You Buy Investments You Don’t Understand
If you ever say, “I didn’t know it could do that,” you had no business purchasing that investment.
#21 You Misunderstand Why Real Estate Is a Good Investment
If you think real estate is a good investment for one of the following reasons:
- Real estate isn’t a “paper asset;” I can put my hands on it
- Somebody else is paying for my investment
- Real estate always goes up
- I’m investing using other people’s money
- 90% of the world’s billionaires own real estate
you need more education. Real estate is a good investment because it has high returns and low correlation with other asset classes. Full stop. Need more info? We just put together a course on that.
#22 You Think the Financial Media Provides Actionable Information
In reality, most of the financial information you see on TV, hear on the radio, read about in the newspapers, or see in magazines is useless entertainment. That goes for most blogs, websites, and internet forums, too. The percentage is much better with books, but it’s still probably lower than the batting average that would get you on to the high school baseball team.
#23 You Fail to Account for Risk When Comparing Returns
Why would you put money in a savings account paying 1% when “the stock market pays 10%?” Just one word. Risk. Why would you pay off your 5% student loans when you could make 10% in real estate? Just one word. Risk.
#24 You Are a Reactive Investor
Even though the financial media insinuates that you should, you’re not actually supposed to change your portfolio in response to ongoing political and economic events.
#25 You Focus on What You Can’t Control
You can control your savings rate. You can control your asset allocation. You can control your investing behavior. But you can’t control what the market or interest rates do. Quit focusing on those things.
#26 You Don’t Understand the Difference Between Deep Risk and Shallow Risk
Deep risks—such as inflation, deflation, confiscation, and devastation—represent permanent losses of capital. Shallow risk, i.e. volatility, is a temporary loss of capital. It is critical to understand the difference. The patient, long-term investor with a solid plan can ignore the latter but ignores the former at grave peril.
#27 You Are Attracted to Complexity
Complex portfolios waste your time, effort, and money. In the words of Thoreau, “Simplify, simplify, simplify.” You need to have a very good reason to add an additional asset class to your portfolio, and the same goes for new investments within a given asset class.
#28 You Are More Interested in Investment Management Than Financial Planning
The real bang for the buck with a financial advisor is the almost free financial planning rather than the expensive asset management. Yet, people are all too often willing to pay for “tactics” rather than “long-term planning.” Or if they’re DIYers, they focus on the tactics and strategies rather than their goals and the least risky way to achieve them.
#29 You Think You Need to Hit Home Runs
Investing is more about avoiding errors and hitting singles and doubles than hitting home runs. You are far more likely to lose the game if you’re swinging for the fences every time.
#30 You Are Focused on the Short Term
Successful investing can only be measured in the long run, and yet investors seem to care what is going across the ticker (updated every few seconds) at the bottom of the TV screen.
#31 You Look for Shortcuts
If you think there is an investment out there that offers stock-like returns without stock-like volatility, you can be sure that there will be someone along shortly to sell you a product that promises to do that but can never deliver it.
#32 You Buy More When the Price Goes Up
Everybody likes a good sale, except novice investors. If you don’t get excited to buy more steak when the price goes up, why would you get excited to buy more stocks, bonds, real estate, or any other investment? The faster it rises, the lower your future expected returns.
#33 You Struggle to Do Nothing
Most of successful investing is doing nothing. Sure, there are investing chores to do—like rollovers when you change jobs, rebalancing, tax-loss harvesting, and directing new money each month into the appropriate investments in your portfolio. But if you feel like you’re not investing unless you’re doing something, especially in times of market volatility, you’re going to hurt your long-term returns. There is almost nothing in investing that must be done “right now.”
#34 You Are Overconfident
Don’t confuse your opinions for real insight. What are the odds that you know more about something than the collective millions of other investors in the world? Not very high.
#35 You Are Underconfident
Too many investors have paralysis by analysis and end up leaving their money in cash for years out of fear that they’ll do the wrong thing. Get started. Save. Invest. Any reasonable investment held for the long term is going to be better than doing nothing.
If you want to be successful at investing and reach your financial goals, become a good investor. Step #1 is to stop being a bad investor.
What do you think? Which of these errors have you made and why? What else can you add to this list?