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Here’s why ‘dead’ investors outperform the living

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“Dead” investors often beat the living — at least, when it comes to investment returns.

A “dead” investor refers to an inactive trader who adopts a “buy and hold” investment strategy. This often leads to better returns than active trading, which generally incurs higher costs and taxes and stems from impulsive, emotional decision-making, experts said.

Doing nothing, it turns out, generally yields better results for the average investor than taking a more active role in one’s portfolio, according to investment experts.

The “biggest threat” to investor returns is human behavior, not government policy or company actions, said Brad Klontz, a certified financial planner and financial psychologist.

“It’s them selling [investments] when they’re in a panic state, and conversely, buying when they’re all excited,” said Klontz, the managing principal of YMW Advisors in Boulder, Colorado, and a member of CNBC’s Advisor Council.

“We are our own worst enemy, and it’s why dead investors outperform the living,” he said.

Why returns fall short

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The average U.S. mutual fund and exchange-traded fund investor earned 6.3% per year during the decade from 2014 to 2023, according to Morningstar. However, the average fund had a 7.3% total return over that period, it found.

That gap is “significant,” wrote Jeffrey Ptak, managing director for Morningstar Research Services.

It means investors lost out on about 15% of the returns their funds generated over 10 years, he wrote. That gap is consistent with returns from earlier periods, he said.

“If you buy high and sell low, your return will lag the buy-and-hold return,” Ptak wrote. “That’s why your return fell short.”

Wired to run with the herd

Emotional impulses to sell during downturns or buy into certain categories when they’re peaking (think meme stocks, crypto or gold) make sense when considering human evolution, experts said.

“We’re wired to actually run with the herd,” Klontz said. “Our approach to investing is actually psychologically the absolute wrong way to invest, but we’re wired to do it that way.”

Market moves can also trigger a fight-or-flight response, said Barry Ritholtz, the chairman and chief investment officer of Ritholtz Wealth Management.

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“We evolved to survive and adapt on the savanna, and our intuition … wants us to make an immediate emotional response,” Ritholtz said. “That immediate response never has a good outcome in the financial markets.”

These behavioral mistakes can add up to major losses, experts say.

Consider a $10,000 investment in the S&P 500 from 2005 through 2024.

A buy-and-hold investor would have had almost $72,000 at the end of those 20 years, for a 10.4% average annual return, according to J.P. Morgan Asset Management. Meanwhile, missing the 10 best days in the market during that period would have more than halved the total, to $33,000, it found. So, by missing the best 20 days, an investor would have just $20,000.

Buy-and-hold doesn’t mean ‘do nothing’

Of course, investors shouldn’t actually do nothing.

Financial advisors often recommend basic steps like reviewing one’s asset allocation (ensuring it aligns with investment horizon and goals) and periodically rebalancing to maintain that mix of stocks and bonds.

There are funds that can automate these tasks for investors, like balanced funds and target-date funds.

These “all-in-one” funds are widely diversified and take care of “mundane” tasks like rebalancing, Ptak wrote. They require less transacting on investors’ part — and limiting transactions is a general key to success, he said.

“Less is more,” Ptak wrote.

(Experts do offer some caution: Be careful about holding such funds in non-retirement accounts for tax reasons.)

Routine also helps, according to Ptak. That means automating saving and investing to the extent possible, he wrote. Contributing to a 401(k) plan is a good example, he said, since workers make contributions each payroll period without thinking about it.

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Personal Finance

As recession risk jumps, top financial pros share their best advice

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There is at least a 60% chance of recession if Trump's tariffs stick, says JPMorgan's David Kelly

Meanwhile, J.P. Morgan raised its odds for a U.S. and global recession to 60%, by year end, up from 40% previously.

“Disruptive U.S. policies has been recognized as the biggest risk to the global outlook all year,” J.P. Morgan strategists said in a research note on Thursday.

Allianz’s Chief Economic Advisor Mohamed El-Erian also warned on Friday that the risk of a U.S. recession “has become uncomfortably high.”

‘There is some nervous energy’

“There is some nervous energy there,” said certified financial planner Douglas Boneparth, president of Bone Fide Wealth in New York, of the conversations he is having with his clients.

Even though stocks took a beating on Friday, “we advise them to focus on fundamentals and what they can control, which means maintaining a strong cash reserve and discipline around cash flow so that they can stay in the market and feel confident about taking advantage of buying opportunities,” said Boneparth, a member of the CNBC Financial Advisor Council.

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Recession or not, maintaining a consistent cash flow and investment strategy is key, other experts say.

“The best way to manage these moments is to maximize your current and future selves is to block out noise that doesn’t apply to your plan,” said CFP Preston Cherry, founder and president of Concurrent Financial Planning in Green Bay, Wisconsin.

Letting emotions get in the way is one of “the greatest threats to life and money plans,” said Cherry, who is also a member of the CNBC Advisor Council.

When it comes to volatility tolerance, sharp drops in the market are to be expected, the advisors say.

“The stock market is unpredictable, but historically, there’s a trend in how the market recovers,” Cherry said.

“In years with market corrections and pullbacks, these are the worst days, which are followed by the best days,” he added.

In fact, the 10 best trading days by percentage gain for the S&P 500 over the past three decades all occurred during recessions, often in close proximity to the worst days, according to a Wells Fargo analysis published last year.

“Being out of the market and missing the best days and cycles after recessions significantly hurt portfolios in the long run,” Cherry said.

Boneparth said his clients also “know volatility and uncertainty is part of the game and, most importantly, know not to sell into chaos.”

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Personal Finance

Amid tariff sell-off, avoid ‘dangerous’ investment instincts, experts say

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As U.S. markets continue to suffer steep declines in the wake of the Trump administration’s new tariff policies, you may be wondering what the next best move is when it comes to your retirement portfolio and other investments.

Behavioral finance experts warn now is the worst time to make any drastic moves.

“It is dangerous for you — unless you can read what is going to happen next in the political world, in the economic world — to make a decision,” said Meir Statman, a professor of finance at Santa Clara University.

“It is more likely to be driven by emotion and, in this case, emotion that is going to act against you rather than for you,” said Statman, who is author of the book, “A Wealth of Well-Being: A Holistic Approach to Behavioral Finance.”

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That may sound easier said than done when headlines show stocks are sliding into bear market territory while J.P. Morgan is raising the chances of a recession this year to 60% from 40%.

“When the market drops, we have sort of a herd instinct,” said Bradley Klontz, a psychologist, certified financial planner and managing principal of YMW Advisors in Boulder, Colorado. Klontz is also a member of the CNBC FA Council.

That survival instinct to run towards safety and away from danger dates back to humans’ hunter gatherer days, Klontz said. Back then, following those cues was necessary for survival.

But when it comes to investing, those impulses can backfire, he said.

“It’s an internal panic, and we’re just sort of wired to sell at the absolute worst times,” Klontz said.

‘Never trust your instincts when it comes to investing’

When conditions are stressful, our frame of reference narrows to today, tomorrow and what’s going to happen, Klontz said.

It may be tempting to come up with a story for why taking action now makes sense, Klontz said.

“Never trust your instincts when it comes to investing,” said Klontz, particularly when you’re excited or scared.

Why investors should hold despite market sell-off

Meanwhile, many investors are likely in a fight or flight response mode now, said Danielle Labotka, behavioral scientist at Morningstar.

“The problem with that, in acting right away, is that we’re going to be relying on what we call fast thinking,” Labotka said.

Instead, investors would be wise to slow down, she said.

Just as grief requires moving through emotional stages in order to eventually feel good, it’s impossible to jump to a good investing decision, Labotka said.

Good investment decisions take time, she said.

What should be guiding your decisions now

Many investors have experienced market drops before, whether it be during the Covid pandemic, the financial crisis of 2008 or the dot-com bust.

Even though we’ve experienced volatility before, it feels different every time, Labotka said.

That can make it difficult to heed to the advice to stay the course, she said.

Investors would be wise to ask themselves whether their reasons for investing and the goals they’re trying to achieve have changed, experts say.

“Even though the markets have changed, why you’re invested, your values and your goals probably haven’t,” Labotka said. “These are the things that should be guiding your investments.”

While there is the notion that life well-being is based on financial well-being, it helps to take a broader view, Statman said.

At any moment, no one has everything perfect when it comes to their finances, family and health. In life, as in an investment portfolio, all stocks don’t necessarily go up, and it’s helpful to learn to live with the good and the bad, he said.

“Things are never perfect for anyone,” Statman said.

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Personal Finance

20 items and goods most exposed to price shocks

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Employees at a clothing factory in Vo Cuong, Bac Ninh province, in Vietnam.

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The Trump administration’s plan to slap steep tariffs on goods from dozens of countries is expected to spike prices for consumers. Some items, like leather goods, will see a bigger jump than others.

The overall impact on households will vary based on their purchasing habits. But most families — especially lower earners — are likely to feel the pain to some degree, economists said.

According to an analysis by the Budget Lab at Yale University, the average household will lose $3,800 of purchasing power per year as a result of all President Donald Trump‘s tariff policies — and retaliatory trade actions by other nations — announced as of Wednesday.

That’s a “meaningful amount,” said Ernie Tedeschi, the lab’s director of economics and former chief economist at the White House Council of Economic Advisers during the Biden administration.

The analysis doesn’t include the 34% retaliatory tariff China announced Friday on all U.S. exports, set to take effect April 10. The U.S. exported nearly $144 billion worth of goods to China in 2024, the third-largest market for U.S. goods behind Canada and Mexico, according to the Census Bureau.

Clothing prices poised to spike

The garment industry is among the most susceptible to tariff-related price shocks.

Prices for clothing and shoes, gloves and handbags, and wool and silk products will all increase by between 10% and 20% due to the tariffs Trump has so far imposed, according to the Yale Budget Lab analysis. Tedeschi noted that some of these price increases could take 5 years or more to unfold.

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The bulk of apparel and shoes sold in the U.S. is manufactured in China, Vietnam, Sri Lanka and Bangladesh, said Denise Green, an associate professor at Cornell University and director of the Cornell Fashion + Textile Collection.

Under the “reciprocal tariffs” Trump announced Wednesday, Chinese imports will face a 34% duty. Goods from Vietnam, Sri Lanka and Bangladesh face tariffs of 46%, 44% and 37%, respectively.

Taking into account the pre-existing tariffs on China totaling 20%, Beijing now faces an effective tariff rate of at least 54%.

“The tariffs are disastrous for the apparel industry worldwide, but especially for smaller countries with highly specialized garment manufacturing,” Green said.

A lot of clothing production has moved overseas over the last 50 years, Tedeschi said, but it’s “very unlikely” clothing and textile manufacturing will return to the U.S. from Asia in the wake of the new tariffs.

“People will still import clothing to a large extent, and they’ll have to eat the price increase,” he said.

Car prices are another pain point

Various Mercedes-Benz vehicles assembled in the “Factory 56” production hall.

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The duties announced Wednesday are on top of other tariffs Trump has imposed since his second inauguration, including duties on automobiles and car parts; copper, steel and aluminum; and certain imports from Canada and Mexico.

The cost of motor vehicles and car parts could swell by over 8% according to the Yale Budget Lab analysis.

Bank of America estimated that new vehicle prices could increase as much as $10,000 if automakers pass the full impact of tariffs on to consumers.

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“Rising car prices are already a major pain point for the vast majority of Americans who live in an area where they need a car to get to work, school, their kids’ activities, and medical appointments,” said Erin Witte, director of consumer protection for the Consumer Federation of America.

“These tariffs will make it much worse, and will significantly reduce Americans’ choices about what car they want to buy,” she said.

Tariffs on specific commodities like aluminum and steel affect consumers indirectly, since the materials are used to manufacture a swath of consumer goods.

White House spokesman Kush Desai pushed back on analyses that prices will spike because of Trump’s tariff policy.

“Chicken Little ‘expert’ predictions didn’t quite pan out during President Trump’s first term, and they’re not going to pan out during his second term when President Trump again restores American Greatness from Main Street to Wall Street,” Desai said in an e-mailed statement.

Trump’s second-term tariffs are orders of magnitude larger than his first term, however.

The first Trump administration put tariffs on about $380 billion worth of goods in 2018 and 2019, according to the Tax Foundation. The tariffs so far imposed in Trump’s second term affect more than $2.5 trillion of U.S. imports, it said.

There’s also evidence that the first-term tariffs raised prices for some consumers.

Retail prices for the typical washing machine and clothing dryer rose by about 12% each — about $86 and $92 per unit, respectively — due to 2018 tariffs on imports of washing machines, according to a study by economists at the Federal Reserve Board and University of Chicago. The increased cost to consumers totaled $1.5 billion a year, the study found.

Tariffs are expected to raise the U.S. inflation rate

Economists also expect the overall U.S. inflation rate to jump due to tariffs.

American businesses that import goods from abroad will be the ones on the hook for paying the cost of tariffs, and economists anticipate that companies will pass at least some of those costs on to consumers.

The tariffs are disastrous for the apparel industry worldwide, but especially for smaller countries with highly specialized garment manufacturing.

Denise Green

director of the Cornell Fashion + Textile Collection

An environment of rising prices for foreign goods may give U.S. businesses cover to somewhat raise their prices, too.

As a result, the consumer price index could jump to 4.5% later in 2025, Capital Economics estimated Thursday. That’s up from 2.8% in February, and roughly double the Federal Reserve’s long-term inflation target.

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