7 Simple Things Most Investors Don’t Do

Tadas Viskanta from Abnormal Returns made a great point in a recent post:

In the financial blogosphere and financial media we are often confronted with debates about issues that really are important only the margin. Of late discussions about active vs. passive, smart beta vs. dumb beta and alternative assets have been at the front and center. The problem is that issues like these are really peripheral to the big problems facing most average investors.

Most investors can safely ignore the debates investment professionals have amongst themselves.

This is something that’s easy to forget when you deal with this stuff on a daily basis. It’s interesting to us that work in the world of finance, but it’s fairly trivial to the average investor. In the spirit of focusing on the big picture, here are seven simple things most average investors don’t do that can make a big difference:

(1) Look at everything from an overall portfolio perspective. While it can make sense to think about a bucket approach for certain future liabilities, you still have to consider everything within the context of an overall portfolio. This means aggregating all retirement funds, brokerage accounts, and emergency savings vehicles into one place. This helps determine how liquid you are, what your true performance numbers look like, how diversified your portfolio is and what your entire asset allocation is.

It’s very difficult to make informed decisions if you’re not thinking about your next move in terms of your overall portfolio.

(2) Understand the importance of asset allocation. Asset allocation is the nerve center of the portfolio. Everything — risk tolerance, performance, expected gains and losses, volatility — really comes down to selecting the correct mix of asset classes. Get this one decision right and it gives you a pretty good margin of safety in other areas of portfolio construction as you look to find your way as an investor.

Stock picking is sexier, but asset allocation is far more important for 95% of investors.

(3) Calculate investment performance. This one seems obvious, but it’s something that most investors don’t do. One study showed that investors overestimate both their absolute and relative performance to the market by an average of 5% a year, so it’s a good way to keep your ego in check. Calculating performance numbers allows you to see how much of your change in market value is driven by investment performance versus how much is due to the money you save.

Comparing your portfolio performance to some very simple benchmarks (such as total market or balanced funds) in relation to your asset allocation over longer time frames can also help make sure the work you’re putting in is worth the time and effort.

Once a year should suffice.

(4) Define a time horizon when making a purchase. Buying an investment is easy. Managing risk after the fact is where things get difficult for most investors. Without an upfront definition of your expected holding period or when you will sell/rebalance an investment, it’s impossible to make rational decisions.

We only become more irrational after making a purchase, so taking the emotions out of your sell decisions by making systematic if/then rules helps a great deal.

(5) Save more every year. Tweaking your portfolio between asset classes or finding cheaper or better funds might make you feel like your doing something to increase your performance, but these are usually marginal improvements at best. The easiest way to grow your wealth will always be to save more money.

Saving just 1% more a year can have a large impact on your ending balance over many decades of compounding. Every 1% you increase your savings rate could translate into the equivalent of 0.4% in annual investment gains. So a 5% increase in your savings rate could add up to 1.5-2.0% a year to your bottom line.

(6) Focus only on what you control. Investors are constantly stressing about where the market is going to go next. Not only does no one really know which way the market is heading, but it’s something that’s completely out of anyone’s control. The factors that most often stress people out about the markets are the things that they have absolutely no control over.

(7) Delay gratification. The entire process of investing is about delaying current consumption for future consumption. A solid investment strategy should do the same. To make money you have to be willing trade comfort now for comfort later.

Here’s one of my favorite Buffett quotes from Guy Spier’s Education of a Value Investor when Spier sat down with Buffett for a charity lunch:

“Charlie [Munger] and I always knew we would become very wealthy,” he told us, “but we weren’t in a hurry.” After all, he said, “If you’re even a slightly above average investor who spends less than you earn, over a lifetime you cannot help but get very wealthy — if you’re patient.”

The starting is the hardest part: the case for robo-advisors (Abnormal Returns)



This content, which contains security-related opinions and/or information, is provided for informational purposes only and should not be relied upon in any manner as professional advice, or an endorsement of any practices, products or services. There can be no guarantees or assurances that the views expressed here will be applicable for any particular facts or circumstances, and should not be relied upon in any manner. You should consult your own advisers as to legal, business, tax, and other related matters concerning any investment.

The commentary in this “post” (including any related blog, podcasts, videos, and social media) reflects the personal opinions, viewpoints, and analyses of the Ritholtz Wealth Management employees providing such comments, and should not be regarded the views of Ritholtz Wealth Management LLC. or its respective affiliates or as a description of advisory services provided by Ritholtz Wealth Management or performance returns of any Ritholtz Wealth Management Investments client.

References to any securities or digital assets, or performance data, are for illustrative purposes only and do not constitute an investment recommendation or offer to provide investment advisory services. Charts and graphs provided within are for informational purposes solely and should not be relied upon when making any investment decision. Past performance is not indicative of future results. The content speaks only as of the date indicated. Any projections, estimates, forecasts, targets, prospects, and/or opinions expressed in these materials are subject to change without notice and may differ or be contrary to opinions expressed by others.

The Compound Media, Inc., an affiliate of Ritholtz Wealth Management, receives payment from various entities for advertisements in affiliated podcasts, blogs and emails. Inclusion of such advertisements does not constitute or imply endorsement, sponsorship or recommendation thereof, or any affiliation therewith, by the Content Creator or by Ritholtz Wealth Management or any of its employees. Investments in securities involve the risk of loss. For additional advertisement disclaimers see here: https://www.ritholtzwealth.com/advertising-disclaimers

Please see disclosures here.

What's been said:

Discussions found on the web
  1. 10 Thanksgiving Day Reads | The Big Picture commented on Nov 27

    […] About Hard Finance Stuff (Motley Fool) see also 7 Simple Things Most Investors Don’t Do (A Wealth of Common Sense) • Tech Bubble Won’t Burst In 2015. 2016? (Bloomberg View) • What Big Economies Got […]

  2. Weekend Reading: Oil Slump Edition commented on Dec 04

    […] Carlson at A Wealth of Common Sense listed seven simple things most investors don’t do that can make a big […]

  3. Retirement Redux | Media scan: Week of December 8 commented on Dec 12

    […] 7 simple things most investors don’t do by Ben Carlsen on A Wealth of Common Sense is a good reminder that among other things, you need to look at your retirement savings from an overall portfolio perspective and increase your savings rate every year to grow your wealth. […]