To all the Fluenteers and the Fluent Few, welcome back!
If you’ve been investing for a while, you’ll recognize most of these mistakes, either because you’ve made them yourself (we all have) or you’ve seen others fall into the trap.
The evidence is clear:
individual investors often underperform not because of what they buy, but because of how they behave.
Here are the seven most common errors, what the research shows, and how you can avoid them.
Happy compounding! 😁
1. Chasing What’s Hot
We’ve all seen it…
a stock doubles, a fund crushes its benchmark, and suddenly everyone wants in.
The problem is, by the time you join the party, most of the gains are gone.
The data: DALBAR has tracked this for decades. In 2023, the average investor lagged the market by about 5.5 percentage points because they bought high and sold low.
The lesson: Performance-chasing is a wealth killer.
The fix: Build an investing plan that tells you when and why you buy. If your only reason is “it went up,” don’t.
2. Trading Too Much
There’s a natural urge to “do something” with your portfolio.
The trouble is, activity often subtracts value.
The data: A famous study of 66,000 households found the most active traders earned 11.4% annually, while the market returned 17.9%. The more they traded, the worse the results.
The lesson: Trading is a tax on your own patience.
The fix: Slow down. Batch decisions monthly or quarterly. Sell only when your original thesis has changed — not because you’re bored.
3. Paying Away Your Returns
Investors often ignore fees because they look small — 1% here, 0.75% there.
But compounding works against you when costs are high.
The data: Morningstar has shown repeatedly that the best predictor of future fund returns is cost. In 2024, 65% of large-cap U.S. equity funds underperformed after fees.
The lesson: Fees are guaranteed. Outperformance isn’t.
The fix: Use low-cost index funds as your core. If you want active management, demand a clear edge and a competitive fee.
4. Trying to Time the Market
It feels smart to “wait out” volatility and buy back in when things look safe.
In practice, this destroys returns.
The data: JPMorgan’s research shows missing just 10 of the market’s best days in 20 years cuts returns dramatically — and those best days often come right after the worst ones.
The lesson: Timing the market is a fool’s errand.
The fix: Stay invested at a risk level you can live with. Adjust your allocation (e.g. 70/30 vs 60/40), not your gut instinct.
5. Putting Too Much on One Bet
Concentration feels powerful. If you’re right, you look like a genius.
But the odds are against you.
The data: Hendrik Bessembinder’s research shows most individual stocks underperform Treasury bills over their lifetimes. The market’s wealth creation comes from a small fraction of winners.
The lesson: Owning just a few stocks raises the chance you’ll miss the rare big winners.
The fix: Use a broad index or ETF as your foundation. Cap single positions at a set limit — say 5% of your portfolio.
6. Forgetting to Rebalance
A strong run in one part of your portfolio can quietly distort your risk profile.
Suddenly, you’re holding far more equity risk than you signed up for.
The data: Rebalancing doesn’t always maximize returns, but it keeps risk aligned with your plan. Threshold rules (e.g. rebalance if 5% off target) are effective.
The lesson: Risk drifts if you don’t correct it.
The fix: Pick a simple rule: annual rebalancing or threshold-based. Automate when possible.
7. Ignoring Taxes
Investors focus on returns, but what matters is what you keep.
Taxes are often the hidden drag.
The data: ETFs tend to be more tax-efficient than mutual funds. Putting the wrong assets in taxable accounts increases “tax drag.”
The lesson: It’s not about gross return, it’s about after-tax return.
The fix:
Put tax-inefficient assets (like high-yield bonds or active funds) in tax-advantaged accounts.
Favor tax-efficient ETFs in taxable accounts.
Use tax-loss harvesting when it makes sense.
The Root Cause: Our Own Psychology
Most of these mistakes come down to human behavior. Loss aversion makes us panic. Overconfidence makes us trade too much. The disposition effect makes us hold losers and sell winners.
The fix?
Build guardrails. Use checklists, write down your thesis, and commit to a process. The goal isn’t perfection. It’s avoiding the unforced errors.
A Simple Investor’s Checklist
Ask yourself:
Are my funds in the lowest fee tier?
Am I diversified enough to capture the big winners?
Do I have clear rules for buying and selling?
Have I set a rebalancing schedule?
Am I optimizing for after-tax returns?
Final thought
You don’t need to be brilliant to invest well. You just need to avoid the mistakes that keep most investors from compounding.
The edge is patience, discipline, and consistency.
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Great list — but I’d add the biggest mistake of all: pretending you won’t change. Markets drift, but so do people. Portfolios blow up not just from volatility, but from investors changing their own rules mid-game.