Finance
5 biggest self-defeating mistakes investors make trying to beat market
Index investing pioneer Charley Ellis says what gave rise to the success of the index fund remains true today: “It’s virtually impossible to beat the market,” he told CNBC’s Bob Pisani on last Monday’s “ETF Edge.”
But Ellis warns of another hurdle just as high as active management’s long-term underperformance that holds back many investors: You might be your own worst enemy when it comes to your investment strategy.
The market’s complexities, volatility and an infinite number of other variables can cause unpredictable price fluctuations, but your own mindset is just as key among the variables that can set your financial portfolio back.
In his new book, “Rethinking Investing,” Ellis details a slew of unconscious biases that impact our thinking about money in the market. A few of the big ones he addresses in the book:
- The gambler’s fallacy: The belief that because you were right picking one stock, you will be right picking all other stocks.
- Confirmation bias: Seeking information that confirms pre-existing beliefs.
- Herd mentality: Blindly following actions of a larger group.
- Sunk cost fallacy: Continuing to invest in failing investments.
- Availability: Being influenced by easily accessible information, whether it is actually valuable or not.
The impacts of these biases on your portfolio strategy can be major, Ellis says, and should lead investors to “rethink” their approach to the market.
“Instead of trying to get more, try to pay less,” he said. “That’s why ETFs … have made such great sense.”
Research shows that ETFs typically have lower fees than traditional actively managed mutual funds, though traditional index mutual funds such as S&P 500 funds from Vanguard and Fidelity are also have ultra-low fees (some are even management fee-free).
Ellis argues that use of lower fee funds, combined with letting go of our behavioral biases, can help investors win years, or even decades, later.
“They’re boring, so we leave them alone, and they do work out over the long run, very, very handsomely,” he said.
Long-time ETF expert Dave Nadig, who appeared on “ETF Edge” with Ellis, agreed.
“People trying to predict people always works out terribly,” Nadig said. A long-term investment in an index fund “helps you overcome an enormous number of these biases simply because you’ll pay less attention to it,” he added.
He also pointed to the mistake many investors make of trying to beat the market by timing it, only to end up outsmarting themselves. “There are more good days than bad days,” Nadig said. “If you’re missing the 10 best days in the market and you missed the worst 10 days in the market, you’re still much worse off than if you just stayed invested. The math on that’s pretty hard to argue with.”
One more mindset shift tip Ellis offered on this past week’s “ETF Edge” for investors focused on having enough invested for a secure retirement: Start thinking about the income stream from Social Security in a new way.
‘The Big Money Show’ co-hosts discuss buy now, pay later spending options and the impact it will now have on your credit score.
Small, everyday purchases like a meal from DoorDash are now able to be financed through eat now, pay later options — a practice that some experts deem “predatory.”
“You’ve got to have enough sense to not follow the urge to finance a taco, okay? You have got to be an adult,” career coach Ken Coleman told “The Big Money Show,” Wednesday.
“This is predatory, and it’s going to get a lot of people in deep trouble.”
RISKS OF BUY NOW, PAY LATER: ‘TICKET TO OVERSPENDING,’ EXPERT SAYS
DoorDash and Klarna are now partnering up to extend buy now, pay later options to consumers. (Reuters, Getty / Getty Images)
Financial wellness experts are continuously sounding the alarm to cash-strapped consumers, warning them of the devastating impact this financial strategy could have on their credit score as some lenders will begin reporting those loans to credit agencies.
Consumers may risk getting hit with late fees and interest rates, similar to credit cards.
“So your sandwich might show up on your FICO score, especially if you pay for it late,” FOX Business’ Jackie DeAngelis explained.
EXPERTS WARN HIDDEN RISKS OF BUY NOW, PAY LATER
Major players like Affirm, Afterpay, and Klarna have risen to prominence at a time when Americans continue to grapple with persisting inflation, high interest rates and student loan payments, which resumed in October 2023 after a pause due to the COVID-19 pandemic.
Ramsey Solutions personal finance expert and ‘The Ramsey Show’ co-host George Kamel discusses the ‘buy now, pay later’ craze and the trend that celebrates the financial benefits of being childless.
“The Big Money Show” co-host Taylor Riggs offered a different perspective, suggesting that company CEOs have a “duty” to attract as many customers as they want.
“Unfortunately for me, this always comes down to financial literacy — which I know is so much in your heart about training people to save now by later,” she told Coleman, who regularly offers financial advice to callers on “The Ramsey Show.”
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Coleman continued to come to the defense of financially “desperate” consumers, arguing that companies are targeting “immature” customers.
“I’m for American businesses being able to do whatever they want to do under the law. That’s fine. But let’s still call it what it is: it’s predatory, and they know who their customers are,” Coleman concluded, “And I’m telling you, they’re talking about weak-minded, immature, desperate people.”
FOX Business’ Daniella Genovese contributed to this report.
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