I bought my first stock more than 45 years ago. Since then, I have lived through the crash of 1987 (Black Monday), the dot-com bubble, the Great Recession, and the inflationary surge that followed the pandemic.
Market cycles change, but one thing never changes: human nature.
In my four decades of watching people try to build wealth, I’ve noticed that the biggest threat to your portfolio is rarely the Federal Reserve, the President, or the price of oil. This is the person staring at you in the mirror.
We are all hardwired to make bad financial decisions. We run from pain (selling when the market falls) and chase pleasure (buying when the market rises).
If you want to retire rich, you have to stop acting like a human being and start acting like an investor. Here are five things to avoid.
1. Trying to time the market
This is a classic ego trap. You convince yourself that you can get out before the crash and get back in before the rebound. Let me be clear: you can’t. Even professionals can’t.
When you try to time the market, you have to be right twice. You have to sell up and buy down. If you miss a few days, you lose your return.
according to Data from JP MorganIf you remained fully invested in the S&P 500 from 2005 to 2024, you’d earn an annual return of about 10%. But if only 10 best days are missed over that 20-year period, your returns drop to a little more than 6%.
Think about that. Missing two weeks of action nearly halved your profits over two decades. The market’s biggest jumps often happen right after its biggest drops. If you are worried about the stock market and waiting for things to calm down, you have already lost.
2. Paying high fees because you’re not paying attention
In every other area of life, you get what you pay for. The Ferrari costs more than the Ford because it is faster and probably better built. You will get something for your money. In investing, the opposite is often true. You could pay more for the same, or even worse, performance.
It’s just that simple: the more you pay in fees, the less you keep.
A 1% or 2% fee seems small. It’s not like that.
seconds completely breaks math. Let’s say you invest $100,000 over 20 years with a 4% annual return. If you pay the 0.25% fee, your portfolio grows to about $208,000. If you pay the 1% fee, that adds up to just $179,000.
That small percentage difference will cost you about $30,000. Before you buy a mutual fund or hire an advisor, look at the expense ratio. If you’re paying more than 0.50% for a standard fund, chances are you may be being scammed.
3. Thinking Can Help You Pick Winning Stocks
I believe in buying individual stocks. The reason is simple: I’ve made a lot of money doing this over the years.
I’ve owned stock in Apple, Microsoft, Amazon, Nvidia, Google, and other big winners for many years; In Apple’s case, 25 years. Sure, I’ve had losses along the way, but I’ve certainly outpaced the returns I’ve gotten from broad-based S&P index funds or ETFs.
But the thing is: I spent 10 years as an investment advisor and for decades I’ve spent several hours every week reading about this stuff. Every weeknight I watch a few CNBC shows for tips and information.
Sounds like you? If it doesn’t, don’t buy the individual stock.
The data shows how statistically impossible it is for you to beat the market over the long term by picking individual stocks. Consider this: Over a 15-year period, nearly 90% of active large-cap fund managers failed to beat the S&P 500. And the managers of these actively managed funds are professional investors, who have institutional research and every bell and whistle at their fingertips.
If they can’t beat the index, what makes you think you can?
Unless you’re willing to invest a lot of time in research, stop trying to find a needle in a haystack and just buy a haystack.
As I explain in the Golden Rules for Becoming a Millionaire, a low-cost S&P 500 index fund will outperform the vast majority of stock pickers over a lifetime.
4. Let your emotions take over
When the market drops, your brain screams “Sell!” To stop the pain. When your neighbor brags about making a killing in crypto, your brain screams “BUY!” To avoid missing out.
This emotional shock is costly. Research firm Dalbar publishes an annual Quantitative Analysis of Investor Behavior (QAIB) reports, and the results are always disappointing.
In 2024, the S&P 500 returned a whopping 25.02%. But the average equity fund investor? He earned only 16.54%.
That’s a difference of about 8.5 percentage points. Why? Because investors panicked, sold at the wrong time, or chased trends that had already peaked. The market did its job. Investors did not.
Here’s something I’ve learned over the years. If you lie awake at night looking at the ceiling, worried about your stocks, it means you have invested too much in stocks. This will cause you to make mistakes.
5. Focusing on the rear-view mirror
There is a cognitive bias called “novelty bias”. This means that we give more importance to what happened recently than what happened in the past.
If tech stocks boomed last year, we put all our money into technology. If bonds crash, we sell all our bonds. We chase past performance, assuming it will continue forever. This rarely happens.
Winners roam. Last year’s hot sector, this year’s dog. If you’re constantly chasing that thing that just works, you’re buying high and selling low – which is the exact opposite of how you build real wealth.
Stick to a varied plan. Rebalance when things get messy. And for God’s sake, stop checking your account balance every day.