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We're attracted to complex ideas, maybe because they sound sophisticated and smart, but when it comes to your money, simple beats complex. The more complicated an investment approach is, the more error prone it tends to be. Even the best strategies can be undone with only one mistake. I'm Barry Ridolts, and on today's edition of At the Money, we're going to discuss how to keep it simple and avoid the
most common mistakes investors make. To help us unpack all of this and what it means for your finances, let's bring in Peter Malukey as the CEO of Creative Planning, which manages over three hundred billion dollars. Peter also wrote two books coincidentally on these exact topics, The First five Mistakes Every Investor Makes and more recently, Money Simplified. So Peter, let's start out with complexity. Why are we so attracted to complex, sophisticated sounding solutions.
Well, I think for two reasons.
One, it makes it easier for someone to sell Hey this is so hard, you really need me. Only I can help you and save the day. And it makes it easier to buy. People want to believe that they can be better at something, and so the harder something sounds, the more complicated it sounds, the more it sounds like the person really knows what they're doing, the more inclined
I am to buy it, you know, and investing. If you come at somebody and explain, hey, I for this part of your portfolio, which would just be really simple, you don't get wonderful from people. Usually they don't go, oh, that's awesome, Peter. They go, wait a second, you mean you're telling me that, Like, it's just I did something seems wrong. I thought you were really sophisticated, Peter. Why is this recommendations so straightforward?
You know, it's not human nature? Huh?
Really interesting? So tell us what are the advantages of keeping it simple?
Well, I think the advantage of keeping it simple is that investing tends to reward simple. Not always, but I think a good rule of thumb is make it as complicated as it needs to be, and no more complicated than that. Like every now and then you could add something incremental. It might even actually help a little bit, but you're not accounting for the hassle and the work and the paperwork and a separate tax form and all
this stuff that you're going to have to do. Think about your goals and say how do I accomplish these. I don't want to do anything that doesn't add incremental value and eat. I also don't want to do things that add very tiny incremental value relative to the other hassles it brings to me.
So the book Five Mistakes Every Investor Makes lists a number of eras. Let's work our way through them and see if we can figure out how to not make these mistakes. Starting with market timing. How hard can that be? You sell right before the market crashes, and then at the bottom you jump right back.
I know it so straightforward that talk about something that's very easy to sell. That's a very very easy thing to sell because everybody wants, okay, I would be the stock market when it goes up, and you've got these special signals that will get me out before it goes down. I mean, look, some of the biggest money managers in America, that's what they're selling, right, And you know, look they're wrong most of the time. It doesn't take a lot of research to figure it out. But by goodness, it's
easy to show. Now, what we do know is that if you buy, if you have an active managers a trader, you compare them to the index. Just say buying the S and P five hundred of the US or an international index that over a decade, over ninety percent of them will underperform the index.
Right, And so in this case.
More cost effective is and simpler is a better outcome. You're not sacrificing making that simple move.
So you mentioned active management, let's talk about active training a related issue.
Again, not that hard.
Just buy good stocks that go up, and when they stop going up, sell them, right.
You know, it's most people are surprised to know that most US stocks over their lifetime underperform the treasury. It's very few stocks that really do well. They tend to lift up the market. Like if you think today, what's lifting the SMP five hundred companies like Nvidia, and a couple of years ago was Apple, and years before that it was Southwest Airlines and Monster Energy. And it always seems obvious through the rear view mirror. It's not the reason.
One of the reasons that indexes does so well is yeah, some of the stocks go to zero, but you could only have a stock go down one hundred percent, you can't go down one hundred and one percent, but a stock can go up ten thousand percent. So an Apple or an Nvidia, or a Southwest Airlines or a Monster Energy can offset dozens and dozens and dozens of failures. Like Bogel said, you don't need to look for the needle in the haystack. Just buy the haystack, and you
wind up lifting up the return. So people who are doing security selection, they wind up with a lot of those stocks that tail that trail the treasury. They wind up missing the needle in the haystack. And that's why the active trader, among other reasons cash drag, expenses, taxes, underperforms.
Huh. Really interesting. So you talked about costs and taxes, you haven't discussed the emotional toll.
And I know you've.
Discussed this in the past. You know, for people who are either actively trading or market timing, what is the emotional toll not just the commitment in time, but emotional energy.
Yeah, that's really I mean, that's an interesting insight because I think that that's the biggest price people pay, is not the monetary price unless they're devastated every time and you see somebody get economically devastated, it's that's that's obviously a tragedy. But most people they just kind of learn a lesson, right, they lose more money than they should have, or they don't perform as well as they should have.
And it's really the emotional toll that you point out, Barry, that really becomes the true negative side effect of being so actively engaged in this emotional roller coaster and absorbing all of this news and thinking you've got a narrative that you could translate into trading, and it doesn't work, and you're up at night thinking about it.
It occupies mental space.
It's not positive, and so I think that for a lot of people, it starts out as spun then they think they can do it, and as you wind up seeing that up and down, it's no different than the emotions of being in a casino for a long period of time. There's those moments of you four you're looking for. But look, if you're doing it for anything but entertainment, you're more likely to have negative energy come out of it.
So what are the practical steps investors can take to try and prevent Some of the first couple of eras, either overtrading or market timing or even stock selection.
Well, I think the first thing an investors should do is figure out what are you trying to accomplish?
Right?
How much money do I need? When do I need it?
Is some of that money coming from social security or rental property or selling my business? What do I actually need from my portfolio? Okay, now I know what I need from my portfolio, so I can back into how much should be in bonds? How much would be in stocks. My situation is a little more complicated. Maybe private equity, private lending, private real estate for more wealthy individuals or people that can afford the.
Liquidity, and then they're on the stock market side. Track indexes.
Get yourself out of the market timing game, get yourself out of the security selection game. You're for sugar to lawyer fees, You're for sugar to lawyer taxes. You're almost certainly going to outperform the active manager.
Really really interesting, So let's talk about performance and financial information. It seems investors hoover up everything they can, they don't really understand their own performance, and they seem to misinterpet a lot of financial data tell us about that mistake.
Well, I think that I think financial data is really interesting to track, like, for example, if you look at mutual fund returns. You can look at a ten year return of a mutual fund and go, oh, on average, they did really great. But the reality is that most investors can lose money in a lot of these top performing funds. An old examples like Mason Value right, so Bill Miller are one of the only people, are the only person ever I believe to beat thats and b
five hundred fifteen years in a row. Then you have peak inflows into the fund and then they're in the bottom one percent on tile of performance. So even though that fund had a great history for most of the time, the reality is most of the investors in the fund lost money. The most recent examples Kathy would do I find very interesting online, But the reality is are fun a lot of money not in there when you have
these great returns, record inflows and then devastating losses. So the average investors experience is often quite different from what they see, and investing is filled with data that looks like that.
Yeah, I jokingly say, if you set the course record on the straightaway but then crash into the wall at the curve. It doesn't count, right, So let's talk about the really big one. Letting emotions and biases interfere with your process. Tell us what investors do where either their cognitive biases or just their emotions get the better of them.
I mean, it's confirmation biases is an incredible bias. I mean, so when I was in New York City a long time ago, maybe a decade ago, I stopped to see our advisors, some of them, and I told him to pick a restaurant. And they said, hey, Peter, we want to go to a steakhouse. They said, hey, I'm you know, headquarters is in Kansas City. Like, take me anywhere, but a steakhouse. You know, we've got steakhouse discovered. They're like, no, no, no,
New York best steakhouses. I'm like, all right, fine, So we go to the steakhouse we are, you know, the waiter comes out, they're going through all the different it's.
One of those steakhouses, right, So they go through the file at.
And then they go through the the porterhouse, and then they go on here here. Now we've got our New York strip.
It was just flown in last night from Kansas City.
So my takeaway was like see, and all of them were like, look, we get the best cut from everywhere. That's how good everything is New York. So we have this confirmation, a bias where we look through everything through our own lens. Most people think they're above it. Nobody is. If you're a Republican or conservative, you might go to the Drudge Report online. You might read the Wall Street Journal.
You might be watching Fox News. If you're a Democrat, you might be you know, there's a lot of websites like huff Posts that you could go to. You might be reading the New York Times. You might you watching CNN or MSNBC. Right, we all are looking for stuff that just already validates what we're thinking.
All of the time.
We're avoiding stuff that contradicts us. We dismiss it, We dismiss the person saying it. This translates into investing. I remember word Buffin talking about when he's looking at a stock, he doesn't just say why should I buy this stock? He asks what can go wrong? And really say if this fails, how did it fail? What's he trying to
do there? He's trying to conquer that confirmation bias, and how it translates to that typical investor is he might have somebody who has Apple today and Apple's struggling this year, and so they might be online looking for all the reasons it will do better right and ignoring the stories that say it's best days are behind us. We tend to just go search for what we want to validate, and it's investing is very powerful emotion.
And finally, the fifth mistake you reference is working with the wrong advisor. Let's talk about that. What is the wrong advisor and what can people do to avoid working with the wrong advisor?
I think to start, I just say it will help for your listeners to understand the profession. Like, so, ninety percent of advisers of which there's three hundred and eighty thousand the other world's not hurting for us, right, about ninety percent are brokers, and so that means that they are not a fiduciary to the client one hundred percent of the time. They don't have to be actor the
client's best interest all the time. Legally, this blows people away, right, I think, because they think, like, oh, my doctor has to write well, yeah, legally they have to my CPA does right, Yes, legally they have to, and you're my lawyer, does right, yes, legally they have to. But the advisor no. The advisor can optionally choose to be a fiduciary, and the majority of them optionally choose not to. They stay brokers. So how does that translate into what it means for
the client. For the client, it means, you know, a broker can have a take a spread on a bomb, they can collect a commission on investment. They can participate in what's called revenue sharing, where if they put you in a fund, some of that money from that fund goes back to the advisor. All of those things are conflicts of interest. It doesn't mean every broker's dishonest. Of course,
there's many honest brokers. But if you are choosing between and then advisor who has to act your best interest all the time and one who doesn't have to act in your bestenters all the time one hundred percent of the time, you would choosebody who has to acting your best interest all the time. Well, the good news is that's eight to ten percent of advisors. It's still thirty something thousand advisors. So mean, if you can find somebody who has to acting your best interests all the time,
and doesn't own their own products. I think that's a good combination of making sure they're on the same side of the table with you.
So to sum up, to succeed in investing, simple beats, complicated long term, beat short term. If you want to avoid errors, steer clear of stock picking, market timing, and if you're working with a professional, work with a fiduciary. I'm Barry Rudolts and this is Bloomberg's At the Money