How Not to Invest 101
6 minute read time.
“Everybody wants to find the next Apple, Bitcoin, and Nvidia…whatever is going to explode up 1,000x, but the reality is we just make all these dumb little mistakes.”
In your quest to save and build your portfolio, you may have picked up a book (or three) promising to teach you how to become a better investor. But has the advice found in tens of thousands of books really moved us closer to becoming the next Warren Buffet? Barry Ritholtz, an author, columnist, host of the wildly popular “Masters in Business” Bloomberg radio podcast, and Chairman and Chief Investment Officer at Ritholtz Wealth Management, says no. And that’s why he set out to teach people how not to invest.
In his new book, How Not To Invest: The ideas, numbers, and behaviors that destroy wealth – and how to avoid them, Ritholtz debunks some of the biggest pieces of what he calls “financial BS.” “Everybody wants to find the next Apple, Bitcoin, and Nvidia…whatever is going to explode up 1,000x, but the reality is we just make all these dumb little mistakes,” explains Ritholtz. “It doesn’t even matter if you pick the greatest company in the world, if you don’t hold it long enough and you don’t know how to manage it, you’re going to run into trouble.”
So, how do we avoid those “dumb little mistakes?” Ritholtz says we need to steer clear of three major areas.
Barry Ritholtz, an author, columnist, host of the wildly popular “Masters in Business” Bloomberg radio podcast, and Chairman and Chief Investment Officer at Ritholtz Wealth Management
AVOIDING BAD IDEAS
First up, avoiding bad ideas. As Ritholtz explains, you’ll find bad ideas (and bad advice) in a number of different places. One of the most common? The media. A member of the media himself, Ritholtz says one of the big reasons is because, as modern media has evolved, many of the “guardrails and gatekeepers” have largely gone away.
Avoiding bad ideas that might stem from the media – whether it’s on TV or social media – boils down to figuring out who’s worth your time and effort to pay attention to. “You can’t just blindly follow advice just because somebody cranks out a magazine, a Substack, or, heaven forbid, a TikTok,” says Ritholtz. “We all have to recognize that nobody understands what’s going to happen in the future. We certainly can’t predict the economy, the market, or individual stocks, so let’s not be so gullible and buy things just because somebody has an idea and it makes its way to the cover of a magazine.”
IGNORING BAD NUMBERS
As Ritholtz says, when it comes to investing, “misleading math” is everywhere. That said, you don’t need to be a math whiz to recognize bad numbers (and pay attention to the good ones). “The kinds of things that most investors need to do are look at the relative performance of a fund, or the after-tax equivalent yield on municipal bonds, earnings or dividends yields for individual companies,” he says. “There are online calculators that make this fast and easy to do.”
The more challenging piece of the puzzle? Avoiding being “fooled by malicious actors who are facile at math,” says Ritholtz. “They abuse numbers to scare you out of markets, to make you fearful about the future, to mislead you about stocks, economics, politics, just about anything. They can create doubt in your mind about your plan.”
He says the same is true for economic data. “Models used to determine non-farm payrolls or changes in the Consumer Price Index mean that these data series are very noisy, with a wide margin of error,” Ritholtz says. “A few insights will prevent you from being fooled by the endless fire hose of economic news. On a long-term trend line, most of it is meaningless noise.”
RECOGNIZING BAD BEHAVIOR
Throughout decades of work in the finance space, Ritholtz has seen more than his fair share of examples of bad behavior harming wealth – everything from misunderstanding how much you’ll actually need for retirement to failing to appreciate the power of diversification.
One of the more common behavioral mistakes has to do with reacting too quickly when there’s market volatility. “Whenever there is turmoil in the markets, my phone and email light up with calls from journalists, investors, and potential clients,” shares Ritholtz. “They typically are excited about the turmoil of the moment and want my hot take. I disappoint them by channeling King Solomon – ‘This too shall pass.’”
Often, the best approach during periods when the markets are swinging is to not panic. Instead, sit back and do nothing. “Enjoy your gains during the long bull market—that’s the easy part,” advises Ritholtiz. “You have to be willing to ride out the hard parts—and that includes recessions and bear markets. That is where advisors earn their keep and investors set up their futures.”
HOW PEAK 65’ERS SHOULD APPROACH INVESTING
We’re at the peak of what the Alliance calls Peak 65®, a time when more people are turning the traditional retirement age of 65 every single day than ever before. If you’re reading this, you’re likely one of them, and you might be wondering – are the rules of how not to invest different for me?
As Ritholtz explains, there are four key factors you need to pay attention to that will drive how comfortable your retirement will be: The size of your portfolio, whether you’re still working, your pace of spending, and your lifespan. Lifespan is one aspect of retirement planning that far too many people ignore, says Ritholtz. “If you’re healthy and you come from a family that’s very long-lived, you may think, ‘Gee, I probably need more equity,’” he says. Estimating just how much more means figuring out the amount you expect to draw down each month and how long you’ll think you need to do so – in other words, putting together a decumulation plan.
[The Alliance’s RISE Score® evaluation tool can give you a quick glimpse on whether you’re on track with your retirement income and spending plan.]
Alliance research shows not having a clear plan for drawing down savings and knowing how to generate income in retirement are major contributing factors to people’s anxiety. Alarmingly, fewer than a third of those who participated in the Alliance’s recent survey said they have a specific income plan in place for retirement. 41% said they don’t know how to stage withdrawals from their accounts.
“It [decumulation] is one part behavior, one part math,” says Ritholtz. As you put together a decumulation strategy, he says it’s important to control what you can control. “We don’t know what the market is going to do. We don’t know what inflation is going to do,” he says. “What you do control when you start putting money into a retirement account, how much you contribute, what other money you save or are saving.”
[Here’s something you can control: getting a guaranteed stream of lifetime income from your annuity, if you have one]
SLOW AND STEADY WINS THE INVESTING RACE
A self-proclaimed “car guy,” Ritholtz relates one of the most important lessons investors can learn to a racecar on the track. “If you hit the course record on the straightaway, but you’re going too fast, and you can’t make a turn, and you hit the wall at the end, the record doesn’t count,” he says. “So you could be the world’s greatest stock picker. But if you’re a terrible seller of stocks, as most people are, well, then what? What good is it if you bought Google or Apple or Nvidia at the IPO and sold it three years later and missed all of the upside?” In other words, slow and steady – with an eye for avoiding avoidable mistakes – wins the investing race.
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