Want to improve your investment results? The deadly sins below are not only among the most serious financial transgressions, but also they’re among the most common. I firmly believe that, if you eradicate these 12 sins from your financial life, you’ll have a better-performing portfolio.
1. Pride: Thinking you can beat the market by picking individual stocks, selecting actively managed funds or timing the market.
Antidote: Humility. By humbly accepting “average” returns through low-cost index funds, you will—paradoxically—outperform the majority of investors.
2. Greed: Having an overly aggressive asset allocation.
Antidote: Moderation. Follow the great Benjamin Graham’s advice and keep no more than 75% of your portfolio in stocks. Once you determine your asset allocation, doggedly maintain it through thick and thin by rebalancing periodically.
3. Lust: Being addicted to financial pornography. Financial pornography—think CNBC and Fox Business—may be entertaining, but it has no lasting value and is actually harmful to your financial health by promoting short-termism.
Antidote: Turn off financial media and delete financial apps from your smartphone.
4. Envy: Chasing performance. This sin trips up more investors than any other. It ultimately leads to the cardinal sin of “buying high and selling low.”
Antidote: Stop comparing your investment performance to that of others. Success is not measured by relative performance, but by whether you meet your own financial goals.
5. Gluttony: Failing to save. You may be a financial saint in every other respect, but—if you fail to save—it’s game over. You can’t invest what you haven’t saved.
Antidote: Start saving something today. Slowly raise your savings rate over time.
6. Impatience: Lacking investing stamina has dire consequences. Patience in financial markets is measured in years, sometimes decades. The first decade of the 21st century was not kind to U.S. stock investors, who lost a cumulative 9%. If you had bailed on U.S. stocks in 2009, you would have missed out on the following decade’s glorious rebound, with annualized returns of over 16%.
Antidote: Patience and a knowledge of financial history. While history doesn’t necessarily repeat, it does rhyme. What history has shown time and again is that markets mean revert—that is, sharp declines are typically followed by rebounds.
7. Sloth: Not contributing enough to get your employer’s full 401(k) match. This is like walking past $100 bills on the sidewalk and being too lazy to pick them up. Similarly, make the effort to rebalance. While doing less is generally beneficial when investing, failing to rebalance is the exception to the rule.
Antidote: If you’re too lazy to rebalance, sign up for a low-cost target-date fund, which will rebalance for you. The antidote for not getting your 401(k) match? Just do it.
8. Fear: Having an overly cautious asset allocation. This investing sin is easy to overlook, because inflation is so insidious. Inflation reduces our money’s purchasing power by some 2% to 3% a year. Hiding out in cash investments guarantees you an inflation-adjusted loss of 1% to 2% annually.
Antidote: Overcome your fear of stocks by understanding their historical returns. History suggests that, while there’s a 46% chance that the S&P 500 SPX, +0.19% will be down on any given day and a 27% chance you’ll lose money in any given year, the odds of losing fall to 5% over 10-year stretches and 0% over 20-year holding periods.
9. Imprudence: Failing to diversify. This is a surefire road to the poorhouse. Consider the lesson of the Japanese stock market. The Nikkei 225 NIK, +0.07% —analogous to our S&P 500—reached an all-time high of 38,915 in December 1989, before ultimately declining 82% to close at 7,055 on March 10, 2009. Even today, the Nikkei 225 remains about 40% below the peak reached 30 years ago. This should give serious pause to those who advocate investing in a single national market.
Antidote: Diversify, diversify, diversify—by owning both stocks and bonds, by owning thousands of securities through index funds, and by funding traditional retirement accounts, Roth accounts and regular taxable accounts.
10. Negligence: Mixing investing and insurance through variable annuities, equity-indexed annuities and cash-value life insurance. Ever read the entire prospectus for an annuity? I didn’t think so.
Antidote: Keep your investments and insurance separate, with one notable exception: immediate fixed annuities.
11. Hyperactivity: Being an overly active investor. It might seem counterintuitive. But when it comes to investing, it pays to just sit on your hands most of the time. Aside from choosing an asset allocation and rebalancing periodically, further efforts are generally counterproductive.
Antidote: Learn to do nothing, aside from rebalancing once a year or so.
12. Aimlessness: Failing to plan for retirement, including drawing up an investment policy statement. An investment policy statement—a set of ground rules for your portfolio—provides the guardrails against the numerous behavioral pitfalls that investors face. This is probably one of the most overlooked facets of investment planning.
Antidote: Don’t delay another day. Have a retirement plan in place, including a written investment policy statement. Review these documents every year.