When it comes to investing, historical returns show us that, for the most part, a buy-and-hold strategy will always outperform an active one.
This means that, once you have a concrete investing plan in place, you should stick with it through thick and thin — no matter what the market does on any given day.
But that doesn’t mean you can randomly buy stocks and bonds and expect things to go your way.
Well, you can, I guess…but you will likely regret it for years to come if you do.
In today’s podcast, I interviewed Peter Lazaroff, financial expert and author of Making Money Simple: The Complete Guide to Getting Your Financial House in Order and Keeping It That Way Forever to find out the biggest mistakes even the most well-intentioned investors make with their portfolios over time.
His answers may surprise you, so you don’t want to miss out. Listen to today’s podcast episode by clicking on the links below:
- Peter Lazaroff
- Planet Money: How Much Does a Cow Weigh [PODCAST]
- How Can a Jar of Jelly Beans Teach Students About the Stock Market?
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Three Tragic Retirement Investing Mistakes to Avoid
Have you ever seen one of those giant jars of jelly beans where you’re supposed to guess how many are inside? These games can be fun, but that doesn’t mean they’re easy. The reality is, it is insanely difficult to guess how many jelly beans can exist in a small space — especially when you have almost no information to go on.
Peter Lazaroff, financial expert and author of Making Money Simple: The Complete Guide to Getting Your Financial House in Order and Keeping It That Way Forever says the investing world works similarly, although there are plenty of experts who do have lots of information.
In the global stock market where there are over 75 million trades per day, you have investment firms pouring billions of dollars into research budgets and trading floors filled with PhDs and experts trying to estimate what a security may be worth. As more and more people guess, there are flaws in their process but the errors tend to cancel themselves out.
This, my friends, is why passive, low-cost investing has been a winner for such a long period of time. With enough guesses being made, clear trends emerge and set the pace.
Lazaroff also says this is why it’s extremely difficult to beat the market over the long-term. Market trends are set by millions of guesses that average each other out, while your personal investing “guesses” could be all over the map.
Don’t Make These Three Investing Mistakes with Your Retirement
At the end of the day, reducing the amount of guessing you make with your portfolio could be the best thing you can do for your retirement. According to Lazaroff, there’s no such thing as a perfect portfolio. There’s only the one you can stick with for the longest amount of time, which gives you the greatest chance at the best returns.
With that being said, there are some mistakes you should never make with your retirement portfolio if your goal is maximizing returns. Here are the top three errors Lazaroff says he sees far too many people make in his career as a money manager:
Mistake #1: Initiating or Expecting Activity for No Reason
Whether investors save for retirement with or without a financial advisor, some of them start to correlate activity with progress. They want to see trades being made in their portfolios or new stocks being purchased at least every quarter. No matter whether these moves are good ones, they make them feel like they’re doing something to reach their goals.
“This need to be active is deeply ingrained in our DNA,” said Lazaroff. And it’s easy to think you’re not helping yourself if you’re not actively managing your portfolio.
But Lazaroff says that’s the opposite approach investors should take since 99 times out of 100 the best action for your portfolio is no action at all.
“Doing nothing is an active choice,” he says, adding that he thinks a lot of people overthink their retirement and investing strategies to their own detriment.
Mistake #2: Being Too Cheap to Pay for Professional Help
There are a ton of ways to invest on your own these days, but there’s something to be said for hiring professional help to manage your portfolio. After all, what’s more important than the portfolio that represents the collective efforts of your entire working years?
Think of it this way: It’s easy to pay someone to clean your house or mow your yard, right? If you pay someone to do it, there’s little they can do to mess it up. On the flip side, if you decide to take care of these chores on your own, it’s no big deal if you miss a sliver of grass or forget to clean your guest bath.
But, your retirement portfolio comes with higher stakes than your home or your outdoor space. If you make too many mistakes or don’t make the optimal moves, the financial toll can impact your portfolio for decades to come.
Lazaroff says that one of the biggest problems with investing is that it’s easy to do-it-yourself if you want. This gets people comfortable overseeing their money when they have no idea all the details they’re missing out on.
The bottom line: Sometimes you don’t know what you don’t know. And sometimes, hiring a professional can leave you better off — even with a buy and hold strategy.
Mistake #3: Failing to Understand Your Time Horizon
No matter how much you love a buy-and-hold investing strategy, it’s easy to get overly excited about clickbait news articles or temporary fluctuations that affect your portfolio. But you have to remember that, when you invest money in the stock market, you’re really making a bet that capital works over the long haul. This year’s returns may not be that great, but it’s the returns you score over 20, 30, or 40 years that matter most.
Also, keep in mind just how long your time horizon might be — even if you’re nearing retirement. Lazaroff says he frequently hears people in their 50s or 60s say they don’t want to “wait something out” or take too much risk because they’re running out of time when really, they have plenty of time to grow their money.
This is another area where having professional help with your portfolio can leave you ahead. You may not have a full grasp on how much risk you should take and for how long, but a fee-only financial advisor can help you figure it out.
To continue learning how to avoid other common investing mistakes and make smart financial decisions, be sure to check out Peter’s new book Making Money Simple: The Complete Guide to Getting Your Financial House in Order and Keeping It That Way Forever.