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All these things are basically designed to prey on the excitement of hitting it big. But the problem is, it just doesn't work. Sometimes you get lucky over a very short period of time. But if you try to build wealth doing this way, it will eventually erode your wealth.
Welcome to the Stay Wealthy Podcast with Taylor Schulte. This is not Taylor Schulte, as you may have noticed. My name is Jeremy Schneider. This is my fifth of five episodes that I am filling in for Taylor. I have been saying that Taylor would be back at the beginning of August, but right before we recorded this episode, Taylor and I looked at a calendar and noticed that there are
Well, there are five weeks in July. Only four of those happen to fall on a Tuesday when he normally releases the podcast episodes. So we decide to let my fifth episode bleed over into August, pushing him back one week further. Sorry, I apologize about that. But I'm really excited about this episode. I hope that you like it and hope that it finds value. So Taylor will be back next week. This is my last episode.
You can find notes, articles for this episode at youstaywealthy.com slash 79. So this week, I want to talk about my seven sins of investing. I want to look at all the wrong ways to invest. I talk a lot about the right ways to invest, but I see these seven common mistakes that can cost you a lot of money. And I want to dive into each of those and see how many of the seven are you guilty of.
Investing can be extremely simple if done well, but it is human nature to complicate it. I think every instinct that we have as humans usually runs counter to wise investing. I don't know what it is, the fight or flight response that we evolved with or something. Whatever human instincts we have, it's usually the opposite of what you want to do with investing. So let's dive in to some of these seven sins of investing.
Sin number one, this is the one that breaks my heart. It usually disproportionately affects young investors who are new to investing. Sin number one is holding cash in a retirement account.
I swear, half the time I talk to someone about a Roth IRA or their first investment account, they don't realize that after you put money into the account, you have to buy an investment with it. And so they contribute money to a Roth IRA and then just leave the cash sitting there without realizing that you need to actually purchase an investment like a stock or a bond or a mutual fund or an index fund.
I think my suspicion is listeners of this podcast are probably not guilty of this sin because I think that if you're listening to an investing or personal finance podcast, you're probably past that step. But please go reach out to the 20-something and 30-somethings in your life who are new to investing and go ask them what their Roth IRA is invested in. And if they say, what are you talking about? I'm investing in a Roth IRA. Or if they're saying, what's better, a Roth IRA or a mutual fund?
They might have a core misunderstanding that a Roth IRA is just a type of account. And what goes in that account is what actually gains value like stocks, bonds, index funds. So that's the number one, holding cash in a retirement account. Don't do it. You need to buy investments. And this maybe doesn't apply if you were like over the age of 65 or 70 and now you're just living off that cash. That's obviously not a big deal. But I'm talking about during the growth phase, that money should be invested.
Number two, picking individual stocks. This one pains me a little bit because I like the fact that investing in a specific company can encourage someone to invest. If you love Amazon and you have Amazon Prime and from your view of the world, you think Amazon's going to take over the world and you want a piece of that action, I like that that can get you motivated and inspire you to invest.
But picking individual stocks has some problems. First, it just increases risk compared to buying an index fund where you buy every stock, essentially. Picking individual stocks increases your risk of owning just a few stocks, plus introduces human error. You can make mistakes. You can buy the wrong thing. You can enter the trade wrong. And it does both these things without
higher expected returns. Normally in investing, if you are willing to endure greater risk, you should be rewarded with greater expected returns. But with individual stocks compared to an index fund, you don't have greater expected returns. You have the same or lower expected returns based on how many fees there are associated with the trades.
But you're introducing greater risk by owning fewer companies. If you just own three companies, for example, and those three go out of business, that's a big risk and you've made a big mistake. But if you own the entire portfolio of the US economy or world economy, that can't happen unless there's some sort of financial apocalypse, in which case nothing matters.
I basically believe that the market is very efficient. It's called the efficient market theory, which means every stock is basically correctly priced based on the sum total of human knowledge. That doesn't mean the stock market is rational. For sure, when Tesla went from $300, which was probably already overpriced, to $1,000 a share, that's not rational. But the thing is, how can an investor take advantage of that irrationality? And the answer, in my opinion, is you can't
predictably do that at all. And if you do beat the market over short periods of time, it's almost certainly due to luck rather than skill. That said, I do have a 90-10 rule, which is if you're a person who loves individual stocks or you want to get into Bitcoin or oil futures or some other kind of more aggressive or exciting trading, I say with 90% of your portfolio, buy and hold index funds.
That guarantees you your fair share of market growth. But with the remaining 10%, go nuts. Go buy some stocks. Buy Amazon. Buy Tesla. Buy some Bitcoin. Buy, you know, trade in oil futures or stock options or whatever you want to do. But make sure your 90% is safe because you don't want your whole portfolio to get blown up because of an investing mistake you made when you could have guaranteed yourself your fair share of all market growth.
Plus, I like the 90-10 rule because if you're as good as you think you are, then your 10% is going to far outpace the 90% and you'll be wealthy from it. And your 90%, you can just like donate to your kids or something. For most of us, I think you'll realize when you compare that your 90% is actually growing faster when you include all your losses and the stuff you don't want to talk about at dinner parties. But when it's baked into the actual total return, it's not doing as well as the index fund. Okay, that's the number two.
Sin number three, chasing past performance. I think this is one that almost everybody is guilty of at some point in their career or at some point of their investing career. And it can be very subtle because it kind of presents itself in different ways. And so chasing past performance is when you look at history, especially recent history, to see what has done well and buy or invest in that thing with the expectation that it will continue to do well.
One that I see a lot right now is everyone is asking me, why am I investing in international stocks? US stocks have done way better. Well, for sure, the last 10 years have been a crazy 10 years for the US because it started 10 years ago, right at the bottom of the financial crisis, and has basically been a straight line up until the coronavirus fiasco. But we've seen 10 amazing years of the US stock market. Meanwhile, international markets have had
problems. Like there is the Greece bankruptcy thing and there's been turmoil in other countries and there have been other international reasons where the international markets have not performed as well as the US market. But what we care about is not what did the best the last 10 years. What we care about is what does the best the
the next 10 or 20 or 30 or 40 or 50 years. And if you look back over the history of the US and international markets, basically every five to seven to 10 years, it flip-flops. Sometimes international does better, sometimes US does better. And so if you're constantly chasing past performance and just moving your money to what just did better, you're going to miss out on what's about to do better.
This can also be seen in Morningstar ratings. If you're familiar with Morningstar, it's basically a mutual fund rating company where you can go do research and they score mutual funds on their success, basically.
that success is measured on a five-star scale. So I've heard of a lot of investors who invest in five-star, morning star rated funds. They say, hey, I just want the best funds. Give me the five-star fund. Why would I buy a crappy fund when I could buy a good fund? You know, it makes sense, like a five-star review on Amazon or something. But here's the problem. The five-star rating is based on past performance. What else could it be based on? And a 2004 study by the Financial Digest found that over the previous decade,
Morningstar five-star funds have returned an average of 5.7%. Not bad, but the US stock market index fund over that same decade returned 10.3%, almost double. And that's crippling. If you look at that growth ratio over career of investing, having 5.7% versus 10.3% is crippling. You'd end up with like 10 times more money with a higher return. And so
That is just an example of how you can kind of get tricked into chasing past performance when human instincts are wrong. It seems like you just want to go with the winners. You want to jump on the bandwagon. It takes kind of a confident and humble person to say, hey, that's what just did good, but we don't know what's about to do good. So I'm going to just go with best investing practices, which is the buy and hold broad, low fee index funds. Okay, that was sin number three. Here comes sin number four, another one that people are almost always guilty of.
timing the market. Timing the market is any sort of reactive change to investing based on what the market is doing or based on what you think the market is going to do. And especially with the coronavirus market volatility right now, I get this question a thousand times a day. And the questions sound like,
Should I get out of the market before the crash? And the answer to all these, by the way, is no. And these questions come in all these different, just slightly different flavors, but they're all the same question. Should I time the market? Because if you're ever doing something to your portfolio based on what the market has just done or what the market is about to do, and thus you're deviating from your actual investing or financial plan, you are attempting to time the market. That's way more likely to hurt you than it is to help you.
So here's some of the questions that I get in all these different forms. Should I sell before the upcoming crash? No, you don't know if the market is going to crash. Nobody does. Should I move to gold? No. Should I wait to contribute? No. Should I invest more now? No, because you should have already invested that money. You probably missed out on some gains if you were holding that cash waiting for the dip. That's timing the market.
Hey everyone. I hope you're enjoying your time with Jeremy. I just wanted to pop in really quick and let you know that my firm is currently offering a free retirement checkup, which includes a 2019 tax return analysis. As a reminder, we specialize in retirement planning for people over age 50 who have accumulated investments of $750,000 or more.
If you're on the hunt for a retirement and tax planning expert, and you want to learn more about our free checkup, just head over to definefinancial.com and click on the big purple button that says free assessment. Again, that's definefinancial.com. Another question. I saw that the CAPE ratio has inverted and we're doomed.
My answer to that is you don't even know what the CAPE ratio is. And everyone else already knows that too. It's price on the market. So no, that should not cause you to time the market. Should I sell before the crash? You already asked that question. Stop asking me. The answer is no. Invest early and often and stop trying to time the market. Okay, that's sin number four. Sin number five, paying high fees. Fees are the silent killer of investing and the fees that are involved in your investments can eat them alive.
A 2% annual fee over the course of a 40-year investing career will erode half of the value of that portfolio.
It's the difference between a million dollars or two million dollars. And those both sound like big numbers for sure, but the difference is still a million dollars. And if you want to live life and go buy a million dollar house, you're going to really wish you had a million dollars left over and not a zero left over. So a 2% annual fee by itself can erode half of the portfolio or will erode half of the portfolio over a four-year career.
These fees can be tricky. They come in all sorts of different names, loads, front loads, back loads, account fees, sweep fees, expense ratios, transaction fees, trading fees, convenience fees, inconvenience fees. All these fees can just eat you alive. And so it's important wherever you invest, if you have a financial advisor, if you're a do-it-yourselfer, look into your investments, look at the statements, look at the expense ratios, see and understand the fees and the impact they have.
a rule of thumb I have is anything that is over 0.5% for a mutual fund, I consider to be a high fee. Index funds usually are around 0.1% or lower. And so when you compare 2% to 0.1%, that's a 20 times difference in fees. I also never pay loads. I never pay upfront loads, which is like a percent of money just to invest. And I never pay transaction fees. If you live in the US at least,
The US is kind of like a beautiful place to invest right now because we just had this war of brokerages. Well, they basically all remove transaction fees. So you can buy and sell stocks. You can buy index funds. You can buy mutual funds without paying transaction fees. Looking at those fees, understanding the fees, understanding the impact they have over the course of a career is very important.
One of these studies that I read about in the Boglehead's Guide to Investing, named after the founder of Vanguard and the popularizer of the index fund, Jack Bogle, describes a study done by the Financial Research Corporation, where they looked at the 11 common predictors of mutual fund success. These include Morningstar ratings, past performance, turnovers,
turnover rate, manager tenure, net sales, asset size, alpha, beta, standard deviation, Sharpe ratio, and expense ratio. And they concluded after doing an exhaustive study on all these different 11 predictors of future performance, 10 of them had no correlation to future performance.
And their conclusion was the expense ratio is the only reliable predictor of future mutual fund performance. So when you're looking at your investments, make sure that you do your best to minimize fees because that's going to leave more money in your pocket, more money in your investments, and more money for it to grow over time. That was sin number five. And sin number six is thinking short term. This is one that I see a lot, especially with younger investors who are
aren't excited by a 10% return. You know, you say you could put $1,000 in and a year later, you have $1,100. That doesn't sound like a very exciting proposition. They want to turn $1,000 to $5,000 in a week. But the problem is that doesn't exist. You know, there's things like Bitcoin or Forex trading or day trading or multi-level marketing schemes. And all these things are basically designed to prey on the excitement of hitting it big. But the problem is
It just doesn't work. Sometimes you get lucky over a very short period of time. But if you try to build wealth doing this way, it will eventually erode your wealth. There's no intrinsic value being built there from profits of companies and real estate that pour money back into investments like real long-term investing does. And so when you think short-term, it's just so much more likely to hurt you than help you.
And so you really have three options when you're investing. You can invest early and often and get rich slowly over decades. That's option A. And option B is you can try to get rich quick and stay broke for decades.
Or option C is there is no option C. You have to choose from A or B. And so between being broke forever and just chasing your tail, trying to get rich quick, or building real generational long-term wealth by investing early and often, then you can actually build wealth. So sin number six, thinking short-term. The alternative, of course, is thinking long-term. Where do you want to be in 10, 20, 30, 40 years? That's how you build wealth. And sin number seven is
It's the big one. It's the most deadly sin, in my opinion. All the other sins, all the big mistakes you can make, all the great things you can do, all this is irrelevant if you are guilty of sin number seven. And sin number seven is not investing early and often.
If you don't put money in, it doesn't matter everything else because it will not grow. And doing just a mediocre job of investing, but if you put a lot of money in, you'll still be fine. But if you put no money in or you put a very little bit of money in over a very short period of time, it doesn't matter how good you are at investing because it will never produce real long-term wealth. So I have an example of that.
I do these Ashley versus Amanda examples where I describe two similar people with slightly different habits. So Ashley invests $500 per month each and every month for 40 years in the stock market. After 40 years, she has $1.2 million. She's not super duper wealthy. It's 500 bucks. Certainly she has lived below her means enough to have that 500 bucks a month to invest.
but she's now a millionaire for doing that amanda on the other half invests 500 per year instead of every month she just once a year throws 500 in an account and instead of doing it for 40 years she does it for 10 years not crazy difference 500 bucks a year is pretty often i guess and 10 years is still a long time
but her $500 per year for 10 years, instead of 1.2 million, Amanda only has $6,907.12. Like nothing compared to 1.2 million. Like that's not going to get her through the next two months, much less take care of her forever. Sin number seven, not investing early and often. The alternative is, of course, investing early and often.
And so when you're investing, I encourage you to not let perfect be the enemy of good. I think a lot of people kind of get analysis paralysis. There's so many different options. There's so many different ways you can invest. They hear all these terms and they do nothing, but just do something. Get that money going. Get that money working for you. Start a plan of regular, early, and often investing. That is how you build wealth.
There it is. Those are the seven sins of investing with the seventh being the most deadly. That brings us to the Q&A portion. Today, we are hopping across the pond to get a question from Jan. Hi, Jeremy. This is Jan from Czech Republic. I would like to know, I've read all of these facts, how even the experts fail to beat the average S&P 500 when they try to pick individual stocks.
Or other research that said that a machine picking stocks at random actually, in most cases, also outperforms a manual picking of stocks. They say that the numbers are massively, almost nobody beats the average. So what's going on? Is this really true? And if it's true, then why are all these...
beginner and amateur investors trying to pick the individual stocks. Like, is there some caveat or isn't this really the most rational thing to do to just buy the index? And why aren't people doing this? Is there any benefit in not doing that?
So leave it to our European friend to be so rational and be confused by the irrationality of the individual stock picker. And so basically, spoiler alert, I agree with you, Jan. There is no secret. I think stock picking will be worse for you over the long term. There's not a clever way to beat the market. There's not.
an analysis you can do or a chart you can look at or a person you can talk to. It's basically all a myth. Why people don't do this? I think it's just the human nature. I think people view index funds as average when they're not really. They're optimal. But they say, well, if some people, if the index is the entire market, some stocks obviously outperform it and some don't.
And it feels obvious looking backwards. I hear all the time someone say, oh, I should have put all my money in Apple in the year 2000. Well, of course, you know that now that Apple is one of the biggest companies on the face of the planet. But I was in college in the year 2000 and Apple was a joke. I remember around that time, Microsoft actually bailed Apple out because Microsoft needed a competitor. Apple made crappy products. Their software was garbage. Their hardware was garbage.
Anyone who, no serious programmers used Apple, no serious artists use Apple. It was just
kind of like very rinky dink intro level computer that wasn't taken seriously. And then they turned it around against all expectations. And that's why their stock went from being very, very low to being very, very high because it wasn't expected. So you can't know that sort of thing ahead of time. But looking back, it feels obvious because now we see Apple as this great, perfect brand. It's like shiny and iPads and iPhones and all that.
all their great products and their great branding and their loyal customers. But you didn't know that ahead of time. And so I think it's just human nature to see what has happened and think they can use that knowledge to apply that to what is going to happen and thus beat the index. But
Like you said, according to study after study after study after study, it doesn't work. I also think there's kind of like big fish stories that we hear from friends. We're like, oh, this guy, he put a thousand bucks into this little penny stock and made 50 million. And oftentimes those are exaggerated or they don't include all the losses or they're partial truths.
So I think that's another kind of human psychology aspect that goes into it. And I think it's also just kind of like why people play the lotto. If you said you looked at studies that show that index fund is superior to stock picking, I guarantee you not buying lotto tickets is better than buying lotto tickets to a way bigger degree. It's still massive amounts of people spend millions or billions of dollars on lotto tickets because you just think you can hit it big. It's hard to wrap your head around the math of why it's so bad.
So that said, Jan, I think you should stick with index funds. But if you do have the bug, I still like my 90-10 rule with 90% of your portfolio, buy and hold index funds. And with the other 10%, go nuts. Go try to catch the big fish. Go play the lotto. Go see if you really can pick an X apple. And I don't think it's likely, but if you do, then you do have your lotto ticket. And if you win, that's great.
Now, one last thing before the show is over. I often get the question, how do I identify a good financial advisor? And the answer I almost always give is that it's very difficult if you don't have a pretty solid baseline understanding of personal finance and investing yourself.
Someone is trying to sell you a high-priced crappy insurance product or if they're an actual altruistic financial advisor working your best interest. If you don't know anything about the space, it's really hard to dissect who is telling you what thing. That said, Taylor Schulte is a financial advisor and he is pretty hesitant to talk about his own business on the show. He's doing this podcast partially for marketing reasons, of course, but he's doing it in the
best way, which is just to put good information out there in the world and hope good things come back to him. And so he's hesitant to kind of sell his own services. So I'm going to take this closing part of my last show to sell his services for him and basically let you know that in my opinion, Taylor is definitely one of the good guys. He is a truly wise, altruistic financial advisor that has your best interest at heart.
He is also a fiduciary, which means he is legally obligated to operate in your best interest, even if he can't.
recommend something to you that maximizes his profits over your growth of your own wealth. And strangely, most financial advisors are not fiduciaries, which is crazy, but that is the world we live in. And so if you are someone with a high net worth or someone who's looking to offload this portion of your life, I would give Taylor a call. You can find him at youstaywealthy.com. He is one of the good ones and he charges in the most
fair and honest way that I know. It's a weird business model because there's a weird space because any financial advisor is trying to earn a living to pay their own bills while also trying to grow your wealth. So it's kind of this inherent conflict of interest. But he is what's called a fee-only advisor, which is...
the best possible business model of these financial advisors. So give Taylor Schultz your call if you're looking to offload this portion of your life. That is it. That is the end of the episode. And that is the end of all five of my episodes. It has been a true blast and an honor. Thank you for having me, Taylor. If you do want to find out more about me, you can find me on Instagram where most of the magic happens at Personal Finance Club, or you can head to my website at personalfinanceclub.com.
That is it. And this is Jeremy Schneider signing off by reminding you to live below your means and invest early and often. This podcast is for informational and entertainment purposes only and should not be relied upon as a basis for investment decisions. This podcast is not engaged in rendering legal, financial, or other professional services.