Investors’ 10 Most Common Mistakes

By Matt Mormino, CFP® | Apr 15, 2022 |

Why following billionaires, viral headlines, and Joe from Accounting won’t help you protect your nest egg.

Investor Mistakes

What we do as Personal CFOs is about so much more than investments. Even the best investment strategy doesn’t move the needle on the success of a plan if you lose sight of bigger planning issues like taxes, estate planning, and insurance. And yet, when someone finds out what I do for a living, 9 times out of 10 the conversation shifts towards investments. It’s understandable. Most of us spend decades building a nest egg that will provide for our families—how it’s doing is a huge concern.

Fortunately, I am in a position to debunk misconceptions and re-align expectations and reality. While the hard truth might kill the mood at a party, prudent investing can help save the long-term financial health of families.

Let’s explore the top 10 common misconceptions, how they happen, and how you can avoid them.

Mistake No. 10: Looking to billionaires for investment guidance

Bill Gates is dumping stocks. Insiders are cashing in tens of millions. OK…and?

I agree that it’s an interesting headline, and I also feel the urge to click it, but I’m careful not to draw conclusions about how to manage my own investments. There are so many factors at play for billionaires that don’t apply to the rest of us: complex tax planning, estate planning, and even unique investment considerations might mean that the right move for them is not the right move for me.

It’s why I don’t look to Simone Biles for a workout routine and I don’t look to billionaires for investment guidance. They’re at a different level. That doesn’t mean an Olympian—or a billionaire—can’t teach me a thing or two (or 50), but if I try to emulate Simone’s workout routine, I’ll likely hurt myself.

Mistake No. 9: Neglecting the Tax Man

In the world of investing there are very few things that we can control, but taxes are—to a large extent—one of them. Paying taxes is a direct hit on your bottom line and effectively erases some of your gains. You have to be mindful of this, least a good looking return can quickly turn ugly. Just ask the Robinhood trader who netted about $45,000 in profits while racking up $800,000 in taxes.

Mistake No. 8: Forgetting the Grain of Salt

We all have a friend, co-worker, or neighbor who seems to have it all figured out. They have a strategy that can’t fail and they are doubling the return of the S&P 500. Don’t forget to take their story with a grain of salt.

The reality is that professional money managers who try to outperform the market fail most of the time, so what makes Joe from Accounting so special? Nothing, really, other than maybe an ability to tell a good story. To draw a comparison, when was the last time you heard about someone losing their shirt at the blackjack table? Probably not as recently as you heard about how Joe from Accounting has a roulette strategy and last month he used it in Vegas to “take down the house” one night. 

Mistake No. 7: Mistaking Luck for Skill

Let’s keep go back to Joe from Accounting. Maybe he showed you his Fidelity account and he’s up 20% this year already. Well, a broken clock is right twice a day. See SPIVA study above.

Mistake No. 6: Wearing Blinders

A misaligned beneficiary designation, outdated estate plan, gap in insurance coverage, or ill-timed tax event could all hurt your bottom line far more than eking out an extra 5% in gains on your investments will help. Getting your financial house in order outside of your portfolio is crucial to success.

Mistake No. 5: Ignoring History

Are we entering a “new normal” that calls into question everything we thought we knew? Is inflation going to average 7% over the next 30 years? Will the market drop and never recover? I’m going out on a limb here…No. History is bound to repeat itself.

Indeed, 5% pullbacks, 10% corrections, and 20% bear markets are all just a normal part of investing in a stock market that has historically trended upward over time. Since 1979, the average intra-year decline of the U.S. Stock Market has been approximately 14%. Even in years with positive returns, investors have experienced intra-year declines of 11% on average, more on that in our Investment Truths white paper.

Mistake No. 4: There’s Diversification and there’s Diversification

Joe from Accounting assured me his is diversified because he has part of his portfolio in the S&P 500. Logic would tell you that 500 stocks makes him diversified, but unfortunately, that’s not the case. People who invest in the S&P 500 are only diversified within one small segment of the global markets. If the S&P 500 underperforms inflation over a 10-year period, your portfolio will show it. It’s happened before and it could happen again.

Mistake No. 3: The Media is not a Fiduciary

The media is compensated by driving clicks and viewers, not by providing sound investment guidance. When you hire a fiduciary, on the other hand, they are bound by law, to act in your best interests in offering unbiased advice and demonstrating a high level of ethics when making financial decisions. Fiduciaries put the client first, even when the client’s best interests are opposed to their own.

Mistake No. 2: Going for a Quick Fix

Sure, it would be easier to get 1,800% returns for two years than to grind it out for 25 years to build a strong portfolio that can meet your needs. Quick fixes, however, can be risky gimmicks. Often times, they’re either doomed to fail from the outset or come with so much risk that you’d be better off sidling up to a roulette table and putting your life savings on black five times in a row.

Mistake No. 1: Not Appreciating Small Wins

Do you have a plan? Are you maxing out your 401(k)? Are you able to save consistently and participate in the market? Celebrate these wins, they are huge! I know…I’m no fun at parties.

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