Most investing advice tells you what to buy.
Barry Ritholtz would rather tell you what not to do.
Get those calls wrong, he says, and the rest barely matters.
In the latest episode of Ticker Take, I spoke with Ritholtz, founder and chairman of Ritholtz Wealth Management and the author of How Not To Invest, a book built around the idea that avoiding mistakes matters more than picking winners. Ritholtz is not a stock picker, and his starting point is that very few people beat the market with any consistency over 10 or 20 years.
His own approach is simple by design. Own a broad portfolio of low-cost index funds, diversify globally, rebalance every few years, and stay out of your own way. In practice that means automating your contributions, maxing out your tax-advantaged accounts, and tuning out what he calls the fire hose of noise the media generates, since you are investing for decades while the headlines come at you every day. Ritholtz says investing itself is essentially a solved problem, and what has not been solved is human behaviour.
That is where the mistakes come in. And he is quick to point out that these are not rookie errors. The professionals make every one of them too. Here are the nine he walked through.
1. Trying to time the market
Everyone wants to sell at the top and buy back at the bottom. Ritholtz says almost no one actually can. Short-term trades get taxed, which eats into your gains. And as he puts it, market tops happen slowly while bottoms happen fast, so the odds of nailing both the exit and the re-entry are slim.
2. Believing complex is smarter than simple
A complicated strategy can feel smarter, which is why people are drawn to them. Ritholtz says simple almost always wins. It costs less, there is less that can go wrong, and you actually understand what you own. The fancier it gets, he warns, the easier it is for risk to hide.
3. Letting politics drive your investing
When their candidate loses an election, a lot of people pull their money out and sit in cash. Ritholtz points to research showing that usually costs them. He notes that presidents get too much blame when markets fall and too much credit when they rise. In reality, the market mostly does its own thing.
4. Underestimating the power of compounding
People badly underestimate how powerful compounding is. Ritholtz uses the example of putting $1,000 in the market and leaving it alone. Left untouched, growing at about 10 per cent per year, it would be worth more than $32 million in 100 years. He says people always guess far lower because that kind of growth just doesn’t feel possible.
5. Falling for survivorship bias
We look at the winners that are still around and forget all the ones that quietly died off. Ritholtz compares it to bragging about your batting average after deleting your strikeouts. It is easy to point to what won in the past, but the more useful question is what wins from here.
6. Panic selling during downturns
When markets fall day after day, your body takes over. Ritholtz says it is the same fight-or-flight instinct that once kept us alive, great for running from danger and terrible for running a portfolio. The time to plan for a crash, he says, is before you are in one.
7. FOMO buying at the top
The flip side of panic is watching everyone around you get rich. Ritholtz says fear of missing out is just greed wearing a different name. Those stories about someone who bought early and made a killing are often exaggerated or missing half the details, and choices made out of greed rarely end well.
8. Action bias
Sometimes people just feel like they have to do something. Ritholtz flips the usual advice: don’t just do something, sit there! Most of the money decisions we make are bad ones, so the easiest way to avoid trouble is to make fewer of them.
9. Anchoring to what you paid
When a stock drops, people fixate on getting back to break even. But the market, Ritholtz notes, has no idea what you paid and does not care. The better question is whether you would buy the stock today at its current price. If the answer is no, the price you paid is not a good reason to keep holding it.
The Ticker Take
The thread running through all nine is that good investing is less about brilliance than about avoiding unforced errors. The kind that come from getting in your own way rather than from picking the wrong stock.
It is a fitting message from the man who wrote the book on the subject. The title, after all, is How Not To Invest. Avoiding these nine mistakes is a good place to start.
Jon Erlichman is a BNN Bloomberg contributor and the host of Ticker Take on YouTube.
