FOR many investors, the biggest threat to long-term returns is not a market crash, stubborn inflation or geopolitical shocks. Instead, it is often their own behaviour.<\/p>\n
That is the central message from Barry Ritholtz, co-founder and chief investment officer of Ritholtz Wealth Management, who argues that avoiding costly mistakes is often a more reliable path to building wealth than chasing the next winning investment.<\/p>\n
Speaking on the recent Better Vantage podcast by published by investment company Vanguard, Ritholtz says investors spend too much time searching for ways to outperform the market when they should first focus on avoiding self-inflicted errors.<\/p>\n
\u201cThe first step to becoming a great investor is don\u2019t be a bad investor,\u201d he says.<\/p>\n
\u201cYou\u2019ll never get alpha if you\u2019re not at least getting beta. You\u2019re not going to beat the market if you don\u2019t at least start with what the market is giving you,\u201d he highlights.<\/p>\n
The remarks come as retail investors have more access than ever to investment information, social media commentary and trading platforms.<\/p>\n
While technology has democratised investing, Ritholtz believes it has also amplified distractions that tempt investors into making poor decisions.<\/p>\n
His latest book, \u201cHow Not to Invest: The Ideas, Numbers, and Behaviours that Destroy Wealth and How to Avoid Them\u201d, deliberately avoids offering another list of stock-picking strategies or market forecasts.<\/p>\n
Instead, he focuses on eliminating the mistakes that repeatedly derail portfolios.<\/p>\n
\u201cI don\u2019t want to tell people what to do,\u201d he says. \u201cHow about, let\u2019s stop shooting ourselves in the foot. Let\u2019s stop making all of these unforced errors. If you avoid all these mistakes, you\u2019re better off than 95% of your peers.\u201d<\/p>\n
The idea was inspired partly by a comment from Charlie Munger, the late Berkshire Hathaway vice chairman, who famously dismissed suggestions that the firm\u2019s success came from superior intelligence.<\/p>\n
\u201cWe\u2019re not smarter than everybody else. We\u2019re just less stupid,\u201d Ritholtz says, citing Munger.<\/p>\n
Separate decisions from headlines<\/p>\n
That philosophy shaped his own investment approach.<\/p>\n
\u201cThe odds are very much against you,\u201d Ritholtz points out. \u201cYou\u2019re not going to be the next (legendary investors) Warren Buffett or Peter Lynch as a stock picker. You\u2019re not going to be a market timer. You\u2019re not going to be able to rotate sectors.\u201d<\/p>\n
Rather than searching for extraordinary returns, he believes investors should concentrate on avoiding predictable behavioural traps.<\/p>\n
One of the biggest pitfalls is placing too much faith in market experts. Ritholtz stresses that investors should not ignore experienced commentators entirely, but they should be highly selective about whose advice they follow.<\/p>\n
\u201cMy advice from the book is, you have to be really selective,\u201d he argues. \u201cJust because some 24-year-old French literature producer booked this guest on TV doesn\u2019t mean that they\u2019re speaking the biblical truth.\u201d<\/p>\n
Investors should also ask a simple question whenever they encounter market commentary.<\/p>\n
\u201cWhat is this person selling? And is this something I need to buy?\u201d<\/p>\n
Separating investment decisions from the constant flow of headlines is equally important.<\/p>\n
Ritholtz says he deliberately maintains \u201ca very robust wall\u201d between his long-term financial plan and \u201cthe daily fire hose of news, noise, opinion, commentary\u201d.<\/p>\n
\u201cWhat happens on a random Wednesday morning in 2026 really isn\u2019t relative to the average person\u2019s retirement in 2046,\u201d he explains.<\/p>\n
\u201cThe business of investing distracts us from the practice of investing,\u201d he adds.<\/p>\n
He also warns that investors often overestimate the value of breaking news, forgetting that financial markets usually absorb widely available information almost immediately.<\/p>\n
\u201cIf it\u2019s in the front page of The Wall Street Journal, or if it\u2019s in a widely distributed blog post or social media, it\u2019s already in the price,\u201d he points out.<\/p>\n
Importance of humility<\/p>\n
Perhaps the biggest lesson he drew while writing the book was the importance of humility. Instead of trying to predict a single future outcome, he says investors should prepare for a range of possibilities.<\/p>\n
\u201cI don\u2019t know what\u2019s going to happen next, but my portfolio has to be robust enough that whatever the world throws at it,\u201d he adds.<\/p>\n
That means accepting that a diversified portfolio may not lead the performance tables every year, but can deliver stronger results over decades through consistency and compounding.<\/p>\n
\u201cIf you want to be a top performer, at least start with what the market gives you and stick with it over the decades,\u201d he highlights.<\/p>\n
Ritholtz also worries that the next generation of investors faces a different challenge altogether \u2013 one fuelled by social media, mobile apps and gamified trading.<\/p>\n
He believes investing is increasingly being treated like entertainment rather than long-term wealth creation.<\/p>\n
People now follow \u201cTikTok investors\u201d and \u201cFinfluencers\u201d, creating what he described as \u201can endless fire hose\u201d of speculative content.<\/p>\n
Rather than banning speculation altogether, however, he advocates putting strict limits around it.<\/p>\n
\u201cPull aside a cowboy account, 3% to 5% of your liquid net worth, go to town, scratch that itch,\u201d he says.<\/p>\n
Investors who enjoy stock-picking, options trading or market timing can indulge those interests without jeopardising their retirement savings.<\/p>\n
\u201cIf it goes to zero, well, it was a tiny percentage of your portfolio. Thank goodness it wasn\u2019t your whole retirement savings,\u201d he says.<\/p>\n
Meanwhile, he advises leaving the rest of the portfolio untouched.<\/p>\n
\u201cLeave your real money unmolested,\u201d he says. \u201cThe long-term money is made by just allowing it to compound.\u201d<\/p>\n
Expensive mistakes<\/p>\n
Among the most expensive mistakes investors make, Ritholtz highlights overconfidence, excessive exposure to market noise and recency bias \u2013 the tendency to assume recent events will continue indefinitely.<\/p>\n
\u201cWe have no idea\u201d what lies ahead for economies, markets or interest rates, he says.<\/p>\n
\u201cAnd yet, we often behave as if we do. That\u2019s probably the single biggest source of error in investment,\u201d he adds.<\/p>\n
He also points to academic research on the Dunning-Kruger effect, which suggests inexperienced investors frequently overestimate their abilities while experts are often more realistic about what they know.<\/p>\n
\u201cIf you understand what your skill set is, you can stay within it,\u201d he says.<\/p>\n
Ironically, Ritholtz admits that even professionals are not immune to costly mistakes.<\/p>\n
He recalls buying Apple shares around the launch of the original iPod and proudly selling them after the stock tripled, only to watch the company become one of history\u2019s biggest wealth creators.<\/p>\n
The experience reinforced another lesson from his research: buying good companies is only half the challenge.<\/p>\n
\u201cFinding a great stock turns out to be, as difficult as that is, the easy part,\u201d he points out.<\/p>\n
\u201cIt\u2019s how long do you hold it? When do you sell?… It\u2019s very difficult to tell the difference often until it\u2019s too late,\u201d he highlights.<\/p>\n","protected":false},"excerpt":{"rendered":"FOR many investors, the biggest threat to long-term returns is not a market crash, stubborn inflation or geopolitical…\n","protected":false},"author":2,"featured_media":614286,"comment_status":"","ping_status":"","sticky":false,"template":"","format":"standard","meta":{"footnotes":"","_share_on_mastodon":"0"},"categories":[177],"tags":[259167,79,115474,18,259172,19,259169,17,259168,259171,234,235,259170,171858,58075],"class_list":["post-614285","post","type-post","status-publish","format-standard","has-post-thumbnail","category-personal-finance","tag-behaviouralfinance","tag-business","tag-compounding","tag-eire","tag-financialliteracy","tag-ie","tag-investorpsychology","tag-ireland","tag-longterminvesting","tag-marketdiscipline","tag-personal-finance","tag-personalfinance","tag-portfoliomanagement","tag-star-biz7","tag-wealthmanagement"],"share_on_mastodon":{"url":"https:\/\/pubeurope.com\/@ie\/117017310941477382","error":""},"_links":{"self":[{"href":"https:\/\/www.europesays.com\/ie\/wp-json\/wp\/v2\/posts\/614285","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.europesays.com\/ie\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.europesays.com\/ie\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.europesays.com\/ie\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/www.europesays.com\/ie\/wp-json\/wp\/v2\/comments?post=614285"}],"version-history":[{"count":0,"href":"https:\/\/www.europesays.com\/ie\/wp-json\/wp\/v2\/posts\/614285\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.europesays.com\/ie\/wp-json\/wp\/v2\/media\/614286"}],"wp:attachment":[{"href":"https:\/\/www.europesays.com\/ie\/wp-json\/wp\/v2\/media?parent=614285"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.europesays.com\/ie\/wp-json\/wp\/v2\/categories?post=614285"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.europesays.com\/ie\/wp-json\/wp\/v2\/tags?post=614285"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}