I have been reading with great interest the personal finance articles published by The Wall Street Journal and The New York Times in recent months. They are a stark reminder to me that successful investing isn't complicated, but it is still hard for many people to accomplish. Let's look at several stories I've read and the lessons we can learn from each investor's mistakes.
Understand Your Time Horizon
The youngest investor we'll meet is Timothy Somers. At only 28, Timothy has an almost 40-year time horizon before he will need his investment funds (assuming he's saving for retirement). And then another few decades in retirement. This means that Timothy can afford to be a long-term investor, completely tuning out short-term market fluctuations.
But that's not how he's framing things. He's worried about volatility this year, rather than viewing any downturns as an opportunity to put more of his savings to work at temporarily lower share prices. Why would a young investor ever wish for higher prices, when they only mean you can buy fewer shares with your systematic savings?
Timothy also doesn't seem to have a target asset allocation, which is essential to a systematic savings plan and successful investing in general. It tells you what to buy more of, or what to buy and sell (i.e., rebalance). Timothy, like most investors, appears to be flying by the seat of his pants, shifting money to international stocks in the last few months because he now perceives US stocks to be expensive. Admitting as much, he says "My short-term thinking is you had such a big run-up over the past couple of years, there's not that much left." The industry refers to this as "tactical management," but I just call it market timing. Either way, it's a recipe for lower long-term returns and greater stress and anxiety compared to just buying, holding, and rebalancing a sensible diversified portfolio.
Have a Plan For Your Goals
Retirement age is the time when the investment mistakes start to add up. At least that's the case for soon-to-be retired, 58-year-old Paul Bachman. Paul is frantically selling stocks on good days to reduce his exposure to the next bear market. At one point, he was 60% invested in stocks, but has since reduced his investment to 50% and plans to go even lower.
Even though Paul has 30 years on Timothy Somers, they are making the same mistake. Paul also has a time horizon blind spot. He seems to think he's a short-term investor, believing his retirement is the finish line, at which point his investing race is over. But retirement is not the end, it's just the first lap around the life-long investing track. Most people in their early 60s will spend three decades in retirement, needing to draw a meaningful income from their portfolio that rises with inflation to offset the fact that everything we buy continually gets more expensive.
Over the next few decades, Paul will face more than half a dozen bear markets, all of them unpredictable but inevitable. He shouldn't be making radical investment changes to avoid them, because bad timing could cause him to miss a significant surprise gain that's an integral part of capturing long-term stock returns. A better approach for Paul would be to figure out how much money he wants to spend from his investments annually and set aside a few years' worth of it in a short-term bond fund. That %, with the rest in a diversified stock asset class portfolio, should serve as his "target asset allocation." He should then sell fund shares monthly or quarterly of the most overweighted asset classes—effectively selling stocks when they're up and selling bonds when stocks are down—to fund his ongoing lifestyle.
"I don't have time to ride it out," Paul says. He'll likely find out in 2040 and 2050 that he had far more time than his younger self imagined, and he'll need a lot more money at that time. Let's hope he learns to plan for it.
Learn From Your Mistakes
Juliet Bashore has a decade on Paul Bachman, at 68, but she also feels old beyond her years. A filmmaker by trade, she's missing the plot of the long-term retirement investing story.
She started reducing her stock allocation earlier this year, which might be OK if it's part of her transition from an accumulation to a spending-focused asset allocation target. But I seriously doubt it. Here's what's not OK—as soon as President Trump announced his trade tariffs in April, and she saw her portfolio drop, she sold 1/3 of her remaining stock allocation. "I'm too old," she thought. Again, if she thinks 68 is old, wait till she sees 88, or 93, and how much more expensive her Hawaiian lifestyle and guava juice beverages have become.
Juliet at least recognizes that this was a mistake; she's already lost double digits in missed recovery returns that could seriously impair her long-term retirement prospects. "I did what everyone tells you not to do and I just dumped it," she said.
But surprisingly, she has no regrets, happy to earn interest on her money market fund.This is the most concerning admission of all. Everyone makes mistakes, but to be a successful investor, you have to learn from them so that you don't make them again. Doing the same thing over and over and not learning from it won't just drive you crazy, it will put you in the poorhouse. Pride won't let some people admit when they're wrong.
Active Management Isn't Worth It, and Fixed Income Won't Cut It
Myra Sletson and Stan Aten are both 69, and both making bad investing decisions. But that's where their similarities end.
Stan has decided that he wants to spend a meaningful chunk of his retirement actively managing his portfolio with individual stocks and timing the market. He has shifted tactically a chunk of his portfolio to international stocks and has been selling his US energy stocks. This approach, he says, "requires him to spend more time tracking global currencies and reading international headlines." Stan says it's worth it, but I don't see how it could be. There is no evidence, to my knowledge, that professional tactical managers outperform buy-and-hold allocations, and I have seen plenty of evidence suggesting they do far worse and trigger greater tax bills. The odds that a novice investor can get market timing right, when the pros fail miserably, are remote. And does constantly researching investments and currencies sound like anyone's idea of an enjoyable retirement? If you're going to work that hard, you might as well stay employed. Stan sounds like the kind of guy you try to avoid talking to at neighborhood barbecues.
Myra's story is familiar; she seems to be reading the same headlines as Juliet. After the April market correction, she moved 80% of her money into cash and CDs, locking in losses that disappeared in just a few weeks for those who stuck around in their stocks. Myra's perception of the current market environment is bizarre; she feels it's less manageable than the 2008 decline, when stocks dropped for 16 months and by over 55%. Myra's seeing ghosts.
Myra has made two big mistakes: (1) reacting to headlines and timing the market, and (2) thinking that the 4-5% returns you can currently get on fixed income is even close to sufficient to achieve her long-term goals. I've already covered market timing, so let's discuss the idea that cash and CD returns are enough for retirees.
If you're planning to spend anything close to 4% per year from your retirement investments, plus raises for inflation, while having to pay taxes on withdrawals, you had better hope to earn more than 4%. That's not close to a "better deal" than investing in stocks, as Myra thinks. Inflation takes away about 3% per year of your interest, and that's after you pay income taxes on what you've earned. Most investors in fixed income only break even or lose money after taxes and inflation; including modest withdrawals on top of those, she's on track to run out of money in less than 20 years. But who knows? She says she doesn't plan to sit on the sidelines forever. Still, if anyone thinks she's going to magically develop the ability to time the market after blowing it so bad recently, I've got a bridge to sell you.
You may think I'm being too hard on Myra; she's an inexperienced investor who has made common but understandable investing mistakes. Not the case. Myra proves that even financially sophisticated people can make devastating yet straightforward investment errors; she spent her career working in banking and surely heard about the simple financial principles I've outlined at some point. But hearing and doing are often unrelated. Our next case study is one of the best examples of this I've ever seen.
The Smart Money Isn't Immune To Dumb Moves
Unlike Paul, Juliet, Stan, and Myra, Michael McCowin is in the latter stages of retirement. At 86 years old, you have to imagine that he's spending a bit from his retirement accounts, but that his biggest priority is leaving an inheritance to his family—his kids, grandkids, and so on. It's usually a mistake to view someone like Michael as having a short investing horizon, despite his age—most of his money will likely last for decades in the inherited IRAs of his family.
Michael is an even more experienced and sophisticated investor than we assume Myra was. He was the Chief Investment Officer at the state pension fund of Wisconsin, responsible for managing the multi-billion-dollar portfolio that funds the retirements of public employees in the state. If anyone knows the ins and outs of investing, it's Michael, which makes his colossal mistake even more noteworthy.
Michael, like so many investors, let headlines and emotions get the best of him last year. Worried that we were overdue for a bear market and thinking that stock prices had become too high after a significant gain in 2023, Michael sold all of his stocks in early 2024. Since that time, the S&P 500 is up over 30%. His move potentially cost him almost a 1/3 increase in his investments, most likely several million dollars or more of lost wealth.
You might wonder how such an experienced investor, who undoubtedly knows all about the risks of timing the market, asset allocation, rebalancing, and so on, could make such a simple mistake. I tooused to think that the most financially savvy people were the best investors. Then I met a bunch of them, heard them share similar stories of the mistakes they made, and realized I was wrong. I now know that the smarter someone is financially, the more complex the ways they find to screw things up.
However, they also struggle to learn from their mistakes, just like everyone else. Michael tells himself, like Myra, that he's happy to be earning 4-5% per year on his money market account (as the stock market leaves him in the dust), and believes that a significant downturn is still coming. When it does, he'll eventually be proven right. That's the sophisticated rationalization I was referring to. Despite being 25% poorer due to his timing mistake, he still doesn't think he was wrong, just early. He believes he knows something—a significant decline is imminent—that the rest of the market doesn't know. He is smarter than we. I doubt it.
Simple, Not Easy
These stories are painful to read, and even more frustrating to think and write about, because they are unforced and unnecessary errors that cost these people dearly. Fortunately, many investors, including Servo clients, avoided these pitfalls. How do we do it?
- We begin by gaining a clear understanding of our financial goals—whether retirement, income, or inheritance—and the time horizon within which we aim to achieve them. It's usually decades, not years. This ensures we put short-term investing results in the proper (usually irrelevant) perspective.
- We then determine an appropriate portfolio asset allocation for the goal, selecting one with a long-term historical return sufficient to achieve success. But return is only half the story. We also have to understand how much short-term discomfort we have had to endure to achieve that return. How much would we have lost in 2002? 2008? 2011? Q1 2020? 2022? Future declines will happen for different reasons than past declines, sure, but the reaction from a diversified portfolio should be in the range of past declines (and recoveries). Forewarned is forearmed.
- We have a strict and highly structured portfolio management approach, which includes rebalancing. We have set % allocations for each asset class, and I return the portfolio to target weights with cash inflows/outflows or whenever holdings drift by more than 20% from the desired weight. This rules-based, mechanical approach eliminates the guesswork and speculation from management, thereby avoiding the very real risk of human error influenced by emotions.
- We have a strict policy regarding portfolio changes—we only make them when your financial goals have undergone significant changes, not based on or in response to news or headlines. Presidential elections, economic policies, interest rates, government debt, and financial crises are all critical factors in economic growth and market returns, but knowing how to adjust portfolios and individual asset class weights to profit from them is beyond the ability of any professional investor. Most people who juggle portfolios in response to current events often end up chasing their tails and earning far less than they would have if they had stayed invested. We can get ahead by recognizing our limitations and, in turn, making fewer mistakes than others.
These aren't difficult concepts to understand, by design. Success in most things finds its roots in simplicity. But they are tough for most investors to implement properly and consistently follow.
That's why investing common sense is so uncommon.
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Paul Bachman, Timothy Somers, Stan Aten, Juliet Bashore stories found here.
Myra Sletson story found here.
Michael McCowin story found here.
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