Barry Ritholtz, co-founder and chief investment officer of Ritholtz Wealth Management and a longtime adviser, digs into the things that have made him “less stupid” in his latest book.
I asked Barry to share the mistakes that trip most of us up and what we can do about it. Below are excerpts of our conversation, edited for length and clarity.
Kerry Hannon: Why are most of us better off sticking to a simple investing strategy?
Barry Ritholtz: Historically, simple beats complex. If you’re going to make something more complicated, there has to be an absolutely compelling reason. The more complicated things are, there are more things to break. Think about how much money has been attracted to Vanguard and Blackstone’s core indexing because it’s simple and it works.
What are some of the pitfalls of building long-term wealth?
The biggest single pitfall is our tendency to interfere with the markets’ compounding.
When I ask people, what is a thousand dollars invested a century ago worth today? They say, oh, a million dollars, $2 million. When you tell them it’s $32 million, their heads explode. It’s shocking to people. But that’s the power of compounding.
Please try not to get in the way of your own money compounding. It’s the single best thing you can do.
barry
What are other common mistakes investors make?
The more active you are, the more transactions you engage in, and the worse you tend to do because you’re just creating more opportunities to be wrong.
And we believe a lot of nonsense. Some of it is just myths that get repeated from generation to generation or ping around trading desks. I always laugh whenever I flip on TV and the market is down 2% and someone says, markets hate uncertainty. Do they really? Because there’s got to be a buyer and a seller. That means that there’s a disagreement as to the value of that asset.
We are wildly overconfident in our abilities to do things that the professionals can’t do. You know, no one would say to themselves, yeah, I could play Michael Jordan one-on-one in basketball. Nobody thinks that way.
But when you step into the marketplace, you imagine that you’re going to beat the house, that you’re going to beat Michael Jordan. But trust me, you’re not. Something like half of all the trades are done by institutions — highly qualified, deeply motivated with the latest, greatest, fastest tools. To imagine that you’re going to step in and beat them on their home fields is just another mistake.
It’s also a mistake to not be selective when you dip into the fire hose of media that comes out about investing. You have to be a little discerning and discriminating. Curate viciously. You have to create your own team of people who you either watch or listen to or read. I don’t mean you literally have to hire them, but hey, these are the people who have a defendable process. They’ve lived through a few cycles. They have a good track record. And it’s not just dumb luck.
, Jason Zweig, and Sam Ro. They have just consistently added value and been more right than wrong. They don’t run around with their hair on fire when we’re in the midst of a huge volatility spike.
What are some questions we can ask to avoid a lot of investment mistakes?
Always ask yourself, what are the risks of this trade? Is this tailored to me, or is this for a general audience? What’s this going to cost — not just the outright costs, but fees, taxes, and, of course, lost opportunities. And who is giving me this advice?
What’s their track record and do they have a conflict of interest? Do they have a fiduciary interest to zealously represent you and to perform their duties with diligence?
They can’t guarantee you what the market or the economy’s going to do in the future, but can they say to you, this is a reasonable portfolio that is defendable and rational and increases the odds that you’ll have a successful outcome down the road?
You quote John Bogle, founder of Vanguard, as saying, “just buy the haystack.” In other words, stick with index funds. Why is that still a great philosophy?
In any given year, a majority of active fund managers underperform their benchmark, say, the S&P 500. Go 10 years and you’re in the single digits of managers who earn their keep and outperform the benchmark. Take it to 20 years, and it’s virtually nobody. You end up with a handful of outlier names and they become household names because they’re unicorns — Warren Buffett, Peter Lynch, Bill Miller.
With the indexes, you get diversification especially if you invest in a bunch of different indexes. You are guaranteed to find the Nvidias, the Apples, the Amazons, whatever are the biggest winners. And you get them in increasing stakes as they do better and better.
“Please try not to get in the way of your own money compounding. It’s the single best thing you can do,” Barry Ritholtz, longtime investor and author (pictured), says. (Photo courtesy of Barry Ritholtz)
You say this is the golden age for investors. What do you mean by that?
You can move money around effortlessly. You can trade for free. You can buy anything. Back in the old days, if you wanted to own international stocks, it was expensive.
To say nothing of the power of walking around with this stuff in your phone, it’s really amazing. Software and technology give investors tools that are just so simple and so inexpensive and so effective. That’s why I call this the golden age of investing. We can do things people dreamed about 25 years ago.
Everybody gets second-by-second, tick-by-tick updates. You want to see how you’re doing today, this week, month, year to date, the past 12 months — it’s all right there. It’s instantaneous.
But please don’t look at your portfolio tick by tick. It’ll make you crazy.
What is the importance of having a financial plan and working with an adviser?
There are ways to improve your life satisfaction with money. But a lot of people don’t go about it that way. One of the ways that helps to get away from the money chase is that when you put a financial plan together, one of the things that ends up coming out of that process is the answer to: What is this money going to? Why do you want to put money in the market?
Maybe you’re saving for your kids’ college, buying a house, or retirement. Now we know how much risk to take in order to achieve your goals. That draws down stress.
When you put a financial plan together, you take as much risk as necessary, but not more, to achieve your goals. You’re working with intentionality, you’re working toward a purpose. If you’re not saving toward a goal, you end up taking on too much risk. That’s how people lose sleep at night.
Having someone to talk you off the ledge and keep you focused on your plan is worth about 2% to 3% a year. That’s a huge amount of returns that simply comes about because someone is preventing you from shooting yourself in the foot. And we, as investors, are our own worst enemies. If we can stop our bad behaviors, we’re all so much better off.
