More than 45 years ago I bought my first shares. Since then, I have lived through the 1987 crash (Black Monday), the dot-com bubble, the Great Recession, and the post-pandemic inflation spike.
Market cycles change, but one thing never changes: human nature.
In the forty years of watching people try to build wealth, I’ve noticed that the biggest threat to your portfolio is rarely the Federal Reserve, the president, or the price of oil. It’s the person looking back at you in the mirror.
We are all programmed to make bad financial decisions. We run from pain (selling when the market falls) and chase pleasure (buying when the market rises).
If you want to retire rich, you have to stop acting like a human being and start acting like an investor. Here are five things to avoid.
1. Trying to time the market
This is the classic ego trap. You convince yourself that you can get out before the crash and get back in before the rebound. Let me be clear: you can’t. Even the professionals can’t do that.
If you try to time the market, you have to be right twice. You have to sell at the top and buy at the bottom. If you miss just a few days, you will destroy your return.
According to data from JP MorganIf you stayed fully invested in the S&P 500 from 2005 to 2024, you would earn an annualized return of about 10%. But if you try to be cute and only missed the ten best days in that twenty-year period, your return drops to just over 6%.
Think about that. If you miss two weeks of action in twenty years, your profits are almost halved. The market’s biggest jumps often happen right after the biggest declines. If you panic about the stock market and wait for the “dust to settle,” you’ve already lost.
2. Paying high costs because you don’t pay attention
In every other area of life, you get what you pay for. A Ferrari costs more than a Ford because it is faster and probably better made. You get something for your money. When it comes to investing, the opposite is often true. You can pay more for the same or even worse performance.
It’s that simple: the more you pay in fees, the less you keep.
A 1% or 2% fee sounds small. That’s not it. It’s a huge hole in your wealth bucket.
The SEC breaks down the math perfectly. Suppose you invest €100,000 over twenty years with an annual return of 4%. If you pay a 0.25% fee, your portfolio will grow to approximately $208,000. If you pay a 1% fee, it only grows to $179,000.
That small percentage difference cost you almost $30,000. Before you buy a mutual fund or hire an advisor, look at the expense ratio. If you pay more than 0.50% for a standard fund, you’re probably getting ripped off.
3. Thinking you can pick winning stocks
I believe in buying individual stocks. The reason is simple: I’ve made a lot of money from it over the years.
I’ve owned shares in Apple, Microsoft, Amazon, Nvidia, Google and other big winners for years; in the case of Apple, 25 years. Sure, I’ve had losers along the way, but I’ve certainly beaten the returns I would have gotten with a broad-based S&P Index Fund or ETF.
But the thing is, I was an investment advisor for ten years, and for decades I spent several hours every weekday reading about these things. Every weeknight I watch a few CNBC shows for tips and information.
Sound like you? If not, don’t buy individual stocks.
The data shows how statistically unlikely you are to beat the market in the long run by picking individual stocks. Think about this: Over a fifteen-year period, nearly 90% of active large-cap fund managers fail to beat the S&P 500. And the managers of these actively managed funds are professional investors, with institutional research and all the bells and whistles at their fingertips.
If they can’t beat the index, what makes you think you can?
Unless you’re willing to invest a lot of time in research, stop looking for the needle in the haystack and just buy the haystack.
As I discuss in The Golden Rules of Becoming a Millionaire, a low-cost S&P 500 index fund will outperform the vast majority of stock pickers over its lifetime.
4. Let your emotions drive the bus
When the market falls, your brain screams “Sell!” to stop the pain. When your neighbor brags about making a killing in crypto, your brain screams “Buy!” to avoid missing anything.
This emotional whiplash is expensive. The Dalbar research agency publishes an annual “Quantitative analysis of investor behavior” (QAIB) report, and the results are always depressing.
In 2024, the S&P 500 posted a huge gain of 25.02%. But the average investor in equity funds? They earned only 16.54%.
That is a difference of almost 8.5 percentage points. Why? Because investors panicked, sold at the wrong times, or chased trends that had already peaked. The market did its job. The investors didn’t.
Here’s something I’ve learned over the years. If you lie awake at night staring at the ceiling worrying about your stocks, you have too much invested in stocks. That causes you to make mistakes.
5. Focus on the rear view mirror
There is a cognitive bias called “recency bias.” It means that we give more weight to what happened recently than to what happened further in the past.
If tech stocks soared last year, we dump all our money into tech. If bonds crash, we sell all our bonds. We chase past achievements, assuming they will last forever. That rarely happens.
Winners rotate. The hot sector of 2025 could be the dog of 2026. If you continually chase what just worked, you’ll buy high and sell low – the exact opposite of how you build real wealth.
Stick to a diversified plan. Rebalance when things get out of hand. And for heaven’s sake, stop looking at your account balance every day.
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