Retirement Answers

Jacob: 00:00

Everybody, and welcome back to another episode of The Retirement Answers Show. My name is Jacob Duke. I'm a certified financial planner. And in this episode, we are gonna be talking about five investing mistakes to avoid, and these are the most common investment mistakes that I see on a day in and day out basis. And so we're gonna talk through some of these.

Jacob: 00:20

And the reason I chose to talk about this is because, in general, investing is one of the biggest components of building wealth, And it's really the cornerstone of everything else that we do. If we don't invest well, we will never become wealthy. Right? You can't budget your way to wealth. And what I mean by that is you can't control your spending so much to where you just become wealthy automatically.

Jacob: 00:45

It's a part of it, but without investing, it doesn't really matter. Also, you can't save on taxes and build wealth that way. Part of saving on taxes is simply, eliminating the risk that taxes present, and therefore you can invest better because you are saving on taxes. And you can't just make a lot of money and earn your way to wealth. I see a lot of people all the time who earn a ton of money yet have nothing to show for it in the way of assets.

Jacob: 01:12

So, those things are all important, but we have to do those things, and we have to invest correctly as well. So without investing, it's really hard to grow your assets for the future. So, there's so many different opinions out there around investing and how to do it correctly, and we hear all these things from friends, families, neighbors. We see it on the news. We see it on these different talk shows.

Jacob: 01:34

One of the funniest ones is whenever you're at the mailbox, what I call mailbox talk, and your neighbor says, man, I made a ton of money investing in this one stock. It's a really new company. You've gotta put your money in it. And so those are always the funniest ones because whenever you hear about someone else's success, it makes you jealous. It makes you envy what they have done.

Jacob: 01:52

And so you are willing to now put a little bit of risk on the table to also invest in that recommendation and therefore potentially lose some of your money. So, we have different opinions. We also have personal biases. We have different things that we like or don't like, and that influences our, investment decisions. And I would say that's typically a wrong thing to do things like who the president is or who the president isn't.

Jacob: 02:17

We have gut feelings. We have different, ideas around what's good or what's bad or what we think is gonna happen in the future. All those personal biases get in the way of making good investment decisions. And what I end up finding out is that most people are not investors in the truest sense of the word. They're guessers, there's traders, and they're thinkers.

Jacob: 02:36

They they don't have a true investment mindset. They're not deploying their capital into a company or a group of companies and saying, hey. I'm gonna give my money away so that that company can take it and make money because of it. So what does it truly mean to be an investor? Well, whenever you are a true investor, you're giving your money away to a company so that they can go and use that money to make more money.

Jacob: 02:57

The company makes more money and performs better, the value of your investment goes up because the company is performing well. This value then increases. It takes time. It doesn't happen overnight. So with all that said, let's go ahead and start talking about the five common investing mistakes that I see.

Jacob: 03:13

And the first one is simply this. We think that things are supposed to happen fast. We think that we're supposed to get the returns quickly. If not, it's a bad investment. Well, when was the last time that anything good happened quickly in your life?

Jacob: 03:27

Sometimes this happens, but overwhelmingly good things take time and it takes patience. You had to save up for the down payment on your house. You had to go through years of schooling before you knew what you needed to before you could get that job. And even when you got that job, there was still a bunch to learn. What about your marriage?

Jacob: 03:44

Did it take time to figure each other out and how to learn to live with each other well? What about kids? Did they know exactly how you wanted them to do things every single time? Did they always obey you? Did they always respect you as an authority figure?

Jacob: 03:56

No. All of those things took time. They took effort. They took patience. Nothing happened quickly, but they were all worth it.

Jacob: 04:03

They all were things that you invested time or resources in. And on the other side of those investments, years down the road, you saw the fruits of that because it was an investment and not a quick win. So the same thing is true about investing. It takes time. You have to have a long term mindset.

Jacob: 04:19

Now, here are some facts. The S and P 500, which we all know about, is up 1374% since 1993. Now that is despite four major market crashes throughout that period. The first one was in 1999 to 2000, the dot com bubble when the S and P 500 went down to 49%. And the next one was 2008, the great financial crisis where the S and P 500 went down 57%.

Jacob: 04:50

And the next one was in 2020 whenever COVID happened. The S and P 500 went down 33 to 34% in a matter of about thirty days. So that was a really quick drop and a really large drop. And then in 2022, we saw the S and P 500 go down around 20%, and that was based off inflation fears and interest rates going up and everything with that, which that's a a recent memory. So, despite all of those major market crashes, if you wanna call them that or corrections, over the last thirty years, the s and p 500 is still up 1374%, which is a great, great gain.

Jacob: 05:26

Another fact that I wanted to throw in here was that the longer that you invest, the greater the probability of having positive returns. And this is based off of a study of the S and P 500 index since 1937. And what this is explaining is the longer you invest, you have a greater probability of having a positive outcome. So if you invest for one day, there's a 53% chance that you will have a positive return that day. If you invest for one month, there's a 62% chance that you will have a positive return for that one month.

Jacob: 05:58

And then if you invest for three months, it goes up to 69%. For one year, it goes up to 76%. For three years, it goes up to 87%. For five years, 92%. Ten years, ninety seven percent.

Jacob: 06:11

So you can see every time period, the percentage probability of having a positive outcome over that time period, that percentage is going up. So what does that tell us? Well, the longer you invest, the greater the probability will be that you will have a positive outcome, which is what we're all looking for. So making money takes time. It's not something that happens overnight.

Jacob: 06:31

You can go earn a living and get paid, but your investments, they take time, whether you're investing in your own business, whether you're investing in real estate, whether you're investing in the stock market, it takes time for those returns to happen. It does not happen overnight. And if you're being told that it does, well, you're being fed a lie and there are people who can make money really quickly. Just know that I'm not saying that not, not anyone can do this. I'm saying that most people cannot.

Jacob: 06:55

So forget about what happens to your investment accounts, your retirement accounts today or this week. So my tip for you on this common mistake is have a long term mindset. Nothing is gonna happen fast, and forget about what happens today or this week. Zoom out, and you will see that your investments are performing well or will perform well at some point in the future. Alright.

Jacob: 07:17

Common investing mistake number two, and it is this, getting in or out of the market because we're trying to beat the market. We all think that we can do it, and if if you haven't tried this before, you're probably one of the few. I've tried this. Most people have tried to beat the market in some way. Well, what does that mean?

Jacob: 07:34

Well, we're trying to buy a stock or even a group of stocks that we think is gonna do better than the overall index itself. So getting in or out of the market, what we would call timing the market, is something that we try to do so that we get in before the market starts going up or we get out before the market starts going down. And so this is a terrible way to invest primarily because it takes so much time, energy, and brain capacity to do it. If you've never done it, then you will not understand this. But if you have, then you probably know what I'm talking about.

Jacob: 08:05

It is it is grueling to go on your computer, on your phone every single day and look at those different investments and just get so upset because they're going down or going the opposite way that you originally hoped. So whenever you're doing this, you're trying to get in or out of the market, you're trying to market time, you're actually not an investor in that situation. You're what I would call a trader, and there's a big difference. Remember back to our first point, investors truly look at the long term. They plan to say, hey.

Jacob: 08:31

I'm not gonna use this money. Right now, today, I'm not gonna try to make a quick return on this. This is something I'm doing for a long time. So what is so bad about getting in and out of the market? Well, for starters, if you guess wrong, you are going to lose money.

Jacob: 08:45

And the hard part is is we have our neighbors and friends and family that that they always tell us about the wins, but they rarely tell us about their losses. So whenever we have someone come up to us and say, man, I made a lot of money in x y z stock this week. You should put your money in it because it's going gonna go a lot higher. Well, that's a risk you can take, but the problem is is you didn't hear about all of their losses previous to that. So, for example, someone can come to you and say, hey, man.

Jacob: 09:10

I made 30% last week on this new stock I'm investing in. But what they didn't tell you is about the week before whenever they lost 50%. So they're already trying to climb out of a hole, So their 30% win doesn't really matter because they're already 50% into a hole. So the losses far outweigh the gains most of the time. Playing that trading game is almost a lot like going to a casino.

Jacob: 09:32

You can win some games or win some hands whenever you go to a casino, but the reality is if you stay long enough and if you play long enough, you will walk out of casino empty handed. The casino will take your money. It's just a matter of how long you stay. And so the same thing applies here because you will walk away with less money. There's an old adage that I like to live by from an investment standpoint, and it's basically this.

Jacob: 09:54

The more you touch your account, the smaller it will get. And so that means if you're taking money out, that means if you're trying to actively trade it or get in or out of the market or try to buy the right stock, the more that you touch your account, the smaller it will get. So getting out of the market because you think it's going to go down could lead to you missing out on good returns. In fact, here's a little bit of data on the reason why maybe you should stay invested. So here's some information on the S and P 500, and it's based on years that they had a really bad start.

Jacob: 10:24

So in 2020, we saw an early decline in 2020 of around 23% For by the end of the year, that that was up around 19%. In 2009, the market was down 16% really early in the year. At the end of the year, it was up 24%. In 1935, it was down 14% to start the year. It ended up 41% higher.

Jacob: 10:44

1982, we were down 11% out the gate, and then 15% was the full year return on investment. So all of these different years, just because the market starts off a certain way does not mean that it will end that way. Okay? So here's kind of what I wanted to leave you with on this time in the market is better than timing the market. That's the one thing I want you to get from this point.

Jacob: 11:05

And if you heard anything today, that is this time in the market beats timing the market. So not many people can trade their way to wealth. The odds are not in your favor. Even though it's possible, I would probably recommend you not do that. I recommend taking a more conservative approach.

Jacob: 11:21

Alright. Moving on to number three, and it is letting your emotions get in the way. So the first thing I wanted to say is that money is emotional. It's one of the things as humans we think about the most, whether it be in a positive or a negative light, we all think about money. Some people have a lot of it.

Jacob: 11:37

Some people have very little of it, but we can all agree that money is important to our lives and how we live. So since money is emotional, we feel the negative effects and they don't feel good whenever things are bad. So from an investment perspective, we hate to see when our $4.00 1 k balance is going down by $10,000. No matter what percentage that is, we don't like, quote, losing $10,000. It just does not feel good.

Jacob: 12:01

We think that, man, that's my hard earned money. It's something that I just it just disappeared overnight. And here's a really interesting, takeaway is that in most of life and especially in investing, the pain of loss far exceeds the pleasure of gain. I'll say that again. The pain of loss far exceeds the pleasure of gain.

Jacob: 12:21

Just because as humans, we tend to fear losing something far more than we enjoy gaining something. And we tend to be more conservative when it comes to investing because we don't wanna lose what we already have. What's interesting though, is that we are willing to spend what we already have, which never gives us a chance to actually invest that money. So just to be clear, we're typically conservative investors, but more liberal in our spending, which is really interesting. Right?

Jacob: 12:47

We're we're scared to lose what we have, but we have a hard time accumulating that thing that we're so scared of actually losing. And so the problem is is we often never have what we're afraid of losing. I see a lot of folks who are nowhere close to being able to retire, yet they're scared to lose their little bit of money that they've saved, but they never did the right things to actually accumulate money that was actually worth having. So it's something to watch out for is is don't be so scared of losing money from an investment standpoint until you truly have a really good nest egg that you actually need to preserve. Until you get to that point, you need to be putting some risk on the table, taking chances, and investing your money in such a way that gives you the potential outcome or return that you're hopefully looking for.

Jacob: 13:28

Another reason that we're emotional whenever it comes to investing is because we have our own personal biases. And one of the biggest ones that that I see often is is political biases. We make our investment decisions based on who the president is or who occupies the senate or who occupies the house. And can I just say that that's a really bad idea? There is no historical evidence that shows that one party helps stock markets perform better than another.

Jacob: 13:54

The there's the data's not there. It doesn't prove anything. So if you think that one particular party or another will help your investment accounts perform better, then you're just confirming your biases. And I'm sorry, but, like, I know that you probably think, oh, shots fired here, but it's just the truth. We just simply can't make investment decisions on the political biases that we have.

Jacob: 14:14

So how do we take the emotions out of our investing? Well, the first thing is is how can we make it robotic, or how can we make it automatic? If you're still actively accumulating or trying to grow your your wealth for the future, then setting up an automatic investment schedule is gonna be important, and you just don't need to look at it. You need to have the money going in every two weeks, every paycheck, every month, whatever it is, have the money automatically going in and automatically invested for you. If you're in retirement, you should have a plan.

Jacob: 14:42

You need to place more faith in your well thought out and well developed plan rather than the headline that you see on the news. And finally, perhaps having an objective third party could help guide you through the emotional roller coaster of investing. So having someone with objectivity speak into and advise you during those tough market times could be invaluable to your long term investment success. So finding the right person, if you're at all gonna hire anybody, finding the right person to do that is important. Hey.

Jacob: 15:08

Wanted to interrupt really quickly before we move on to the next common investing mistake that I see. If you're enjoying the show and you feel like other people need to hear this, go ahead and give us a five star review and send it to a friend. That would help me out a lot, giving me feedback and and understanding, hey. Are we doing a good job here? And then also, it would help others find the show because of the way the algorithm works.

Jacob: 15:29

The more ratings and reviews that the show gets, it will be broadcast out to more people for them to find. So thank you for doing that. Let's go ahead and jump back to the fourth common investing mistake that I see. Alright. The fourth investment mistake that I commonly see is going to be that people are not diversified.

Jacob: 15:47

And what's even scarier is they think they're diversified, yet they're still not. So we've all probably heard about diversification and why it's important, but what is diversification? Well, diversification is a risk management mechanism, and it's designed to eliminate the threat of loss because you're not putting all of your eggs into one basket or you're not investing in just one singular stock or even a group of stocks. So in the simplest terms, instead of buying one stock, you can buy two stocks in case one of them doesn't make it. That way, you won't lose all your money.

Jacob: 16:21

So that's the simplest, most basic way to understand diversification. And then we can take it from there to the next level and say, I'm not gonna buy just Apple stock. I'm gonna buy all of the tech stocks that are available to buy. Or I'm not going to buy only tech stocks. I'm gonna buy all of the available sectors like tech, energy, financial, health care, and so on.

Jacob: 16:41

And then we can go even farther and say, I'm not gonna buy only US stocks. I'm gonna buy international stocks as well. So do you see how that there's different levels to diversification? It's not just like this thing in the sky that we say, oh, I'm diversified. It's there's different levels that we can diversify at.

Jacob: 16:57

And so whenever you hear someone say, hey. You need to diversify your investments. Well, they're likely talking about the broad diversification, which would be, hey. I'm gonna invest in every available stock out there in the in The US and international so that at any given point, I'm capturing the full market's returns that are being provided. So what does that mean?

Jacob: 17:15

Well, in The US, there are about 3,500 stocks that we can buy in the open market. And 500 of those, the 505, are the S and P 500. The other 3,000 are small and mid cap companies that we don't really know of or haven't heard of. The 500 are the main ones that we know about, but even more so in the international markets, there's another 10 to 12,000 stocks that are available to buy. So that means there's around 13 to 15,000 stocks out there in the world that we can invest in.

Jacob: 17:43

So how do we know which ones will actually be better or worse? We don't. So how do we actually diversify? Well, good news. We have mutual funds and ETFs that will help us do that.

Jacob: 17:55

Previously, before those came out, we actually had to go buy all of those individual stocks to do get diversified because there was no mutual funds or ETFs to buy. Nowadays, we have index funds that help us buy all of those different stocks, and that way we can buy just one or two or three or four different holdings. It makes it a lot easier. And a very common misunderstanding that I see in a lot of investors is that they think that the more funds they have in their accounts, the more diversified they are. But I want you to listen to this.

Jacob: 18:24

More mutual funds does not equal more diversification. And the reason for that is because I can own 20 different mutual funds that all are investing in the same thing. I own 20 funds, but they're not diversified because they're all investing in the exact same holdings. So just know that the more holdings or funds that you have in your accounts does not mean that you are more diversified. So this is actually something I see with a lot of advisors.

Jacob: 18:47

They do a lot of different holdings, a lot of different funds to make it look sophisticated, but the reality is they're not helping you out very much. The purpose of diversification is to lower the standard deviation. I know that's a big word, but, basically, it just means that you're trying to decrease the distance between the highs and the lows. And, ultimately, true diversification helps you get the highest possible return for the lowest amount of risk within that particular asset class. Now we can diversify even more outside of, like, just stocks by holding different types of investments or assets.

Jacob: 19:20

We can hold bonds. We can hold cash. We can hold real estate. All of those different investment types also diversify us even further outside of the stock asset class. By holding these different investments, you're essentially lowering your risk.

Jacob: 19:34

Now these different investments do have some correlation, but overall, they help you lower your exposure to any one specific asset class. So when clients come to me, Jacob, is it possible for me to lose all of my money? The answer is yes. It's absolutely possible for you to lose all of your money, but no. It's not because of the way that we're investing.

Jacob: 19:53

If we're diversified and we're buying the full market across US and international markets, in order for you to lose all of your money, the world would have to be ending. Meaning, every company in the world would have to go away. If that happens, how much money you have doesn't really matter anymore. The only way to lose all of your money is to bet on one stock or bet on a small group of stocks like Sears, Enron, Blockbuster, Lehman Brothers, Toys R Us. Those are some examples of, hey.

Jacob: 20:19

You could lose all of your money if you invest in those singular stocks and put all of your wealth into those. If we're investing in a diversified manner, yes, we will still have fluctuation. We will have ups and downs, but we're betting on the economy of the world, the markets throughout the world to continue moving forward and and progressing and finding a way to make money. So that's what we're betting on whenever we're being a diversified investor. So diversification is a key component to any good investment plan, and that leads us to the fifth and final investing mistake that I commonly see, and it is this, not having a plan.

Jacob: 20:56

And this might be the biggest mistake. If you don't have a plan, all the other mistakes begin to pile up. If you don't know why you're investing, you're going to make the mistakes that I previously mentioned. If you're not investing for the long term, you're going to start getting out of the market when you get scared, emotional based investing. If you don't have that long term mindset, then you're going to think things are supposed to happen fast.

Jacob: 21:16

Or if you're too aggressive, you might be under diversified by trying to buy one company or one stock that you think is going to be better than another. If you don't have a plan for your money and how it's going to be invested, those other mistakes will begin to come up. In fact, I've got an example here for you of someone that I talked to here locally, and their investment performance was really poor compared to the overall markets. And it's because they are not investing with a plan or investing with intentionality. So I'm just gonna run through really quickly some of the returns they've received and then what the stock market did over those years.

Jacob: 21:48

Back in 2016, they got a positive 1.9% return. The overall market did 10.3. In 2017, they got 8.5 and the market did 23. In 2018, they did negative 3.5% and the market did negative 9.5%. And then in 2019, 14.7 and the market did 26.9.

Jacob: 22:12

2020, they got 8.1 and the market did 18%. In 2021, They got 4.6% and the market did 17%. Okay. So those are some investment returns compared to what the market provided. And if I can tell you one thing, this is someone who's not close to retirement.

Jacob: 22:28

This is someone who should be growing and taking as much risk as possible within the asset class of stocks. And they are missing out on so many returns because they don't have a plan for how they should be investing. And this is someone I talked to, and then they also still declined to to take my advice. And so, I hate to see that, but this is something that you, as an investor, have to be aware of and pay attention to. If you don't have a plan, your returns will underperform, and you will not achieve the results that you're looking for.

Jacob: 22:56

And what's really scary is it's very common for people to not have a plan. I see it all the time. People are hoping their way through. And if you learn anything from today's episode, I want you to learn this. Hope is not a plan.

Jacob: 23:10

You can't hope your way to wealth or investment success. You have to know why you're doing what you're doing and then build a plan around that that's intentional, which brings up a good point. You have to establish your why. If we don't know why we're investing, we will do it the wrong way. We could be investing for retirement, which means depending on how far away from that, we need to invest accordingly, or we could be investing for a new car that's five years down the road.

Jacob: 23:33

We need to invest a certain way to meet that need in five years. We wouldn't wanna be too aggressive, but we also don't need it all sitting in cash for five years. We may have enough money already for ourselves, and we could be simply investing for our kids or our grandkids' inheritance one day, which means we have an even longer investment horizon. So all of these different things matter in terms of how we should be investing our money. So establish your why, and then you can build a plan around that.

Jacob: 23:57

And so having a plan for your money allows you to invest it correctly, and it helps you avoid making those big investment mistakes. Alright. So those are the five common investing mistakes that I see, very often, and I wanted to share those with you as well as some of the reasons behind them and how we can combat those different mistakes. I hope you've enjoyed this episode of the Retirement Answers Show. And as I mentioned before, go ahead and share it with a friend if you think they find it helpful and give us a review on Apple Podcasts or Spotify.

Jacob: 24:27

That would be really appreciated. Thank you so much, and I look forward to talking with you again next week.