Episode 43 – Common Investing Mistakes
26:04
Todd Pisarczyk & Nik Miner
Link to an article mentioned in the podcast:
Three Common Investing Mistakes
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TRANSCRIPT
Welcome everybody to the Momentous Wealth Podcast, where we discuss current issues in the world of finance and break them down into understandable terms to further your education. Momentous Wealth Management is a financial planning and investment management firm based in Washington. We've been serving clients for more than 20 years, and on this show, we take that experience and put it to the microphone in an effort to educate investors in the complex world of finance and financial markets. Hey everyone. Welcome back to another episode Today, it is myself, Nik Miner and Todd Pisarczyk. And today we are talking about three common investing mistakes. And stay tuned. This is episode one of two. Today we're talking about mistakes, and then the next episode we're gonna be talking about what should you be doing instead. So it should be a good episode today, just sidebar, I've never made any investment mistakes, so you can, you've got pro learn from you're, you're that's, that's why we've been waiting to do this one, Nik. Yeah. So you, you might have noticed Nik has been absent from the last few podcasts, which is why we've been waiting to do this one because, because of the fact that he's never made an investment stake. Yeah. So we wanna talk about that. But Nik, where have you been? Why have you been gone? Yeah, great question. My wife and I welcomed our first child into the world.
My wife gave birth six weeks ago from the recording of this, so who knows when, but January 26th, Elizabeth Daphne Minor. So she's the cutest baby in the whole wide world and love her a bunch. It's been a, it's been a crazy but really rewarding six weeks so far. That's awesome. Yeah. Yeah. Most importantly, because we all know you're affection for your cat. Yeah. Do you love the baby more than the cat? I do. Okay. I do. I, it took me a little bit to change my screensaver on my phone, but it is now little Lizzy, she's on my phone. Oh, prove it. Look at prove O Okay. I can attest. He's, yeah. Yeah, he's not lying. It did take a day or so. Awesome. I told Mabel my cat, I was like, don't worry, I still love you. This doesn't, this doesn't take away from my love for you. Alright. Let's talk about passing from Think I'm crazy. Congratulations. We're excited about the family and we're excited you're back. Thank you. We're, it's good to be back. I, yeah, I had five weeks kind of off and working from home, but it is nice being back in the office and being productive. I do miss the firm survived. I'm surprised. Yeah. I know you're around for like 15, 20 years before, but I surprised you did it for two weeks. Did you ever drive by to check to make sure the office is still standing?
Nodding no. Not, not a chance. Not a bummer. No. Well that means you trust us. Yeah. Okay. Well today the three mistakes we're gonna talk about, I'm excited. 'cause actually two of 'em, when I read these stats, I was actually pretty surprised. So the first thing we'll talk about I think is something that a lot of you have probably heard, but the second two are really quite interesting. So we would encourage you to stay tuned for the whole episode. I'm excited Hook there. Yeah, just if you haven't caught on yet, Todd is like, he's the, he's got the details and I'm here just for color commentary. So you and I listener are in for a treat. Well, I'm gonna put you on the spot 'cause I'm gonna ask you questions like I normally do. So let's get into it. So three common mistakes that, that we see investors make. And I will say that we got this. So Dimensional Fund Advisors, DFA for short, they just put out this paper, it actually just came out on February 22nd, 2024. Really great articles. So the stats that we're gonna be sharing today are from that article and really great stuff. So, you know, first and foremost, we hear this all the time as snake number one is trying to time the market, you know, over and over. Classic. You hear that? Yeah. Yeah. Like, don't try to time the market.
So again, if you're an investor, you've probably heard that, but, but we wanted to share some stats that I think are just kind of a good refresher. Yeah. Of, of why that's not a great idea. Maybe before we even talk about stats, maybe just quick breakdown. What does it mean to time the market? It's when you're making investment decisions based on like a short time window of where you think the market's gonna go. So like if you're thought like, ah, the market's gonna go down, I'm gonna, I'm gonna take my money out of investments and you know, I'm not gonna lose that value. Or on the flip side, if you're like, oh, I think the market's gonna do great, now's the time to get in. When you're making those short term decisions based on where you think the market's gonna go, that's timing the market. Yeah. And I, and I really think like the last few years has taught us a huge lesson on this. Yes. Because I think if you go back, you know, I mean the last year was a huge year. The s and p 500 was up, I was around 25, 20 6%. Really good year. If we'd have gone back in the beginning of the year and said, Hey, you're gonna have the Fed raising interest rates at the fastest pace ever in history and you're gonna have all this turmoil and wars and everything that we went through. Bank failures. Yeah.
You know, if we said, Hey, here's all the things that's gonna happen, but we think the s and p's gonna still go up by 25, 20 6%, you'd think we were crazy. Yeah. Right. If you'd have known all the headlines that were gonna happen last year, you might've been hesitant to invest. Yeah. And, and so, you know, so the stats behind this, I mean this is pretty crazy. So if you go back and, and I like these stats where we look at kind of more modern history. So this is the last 25 years and I've seen this stat a bunch of times, but I've seen it played back to like 1926. But this is just since 1999. So if you would've invested, and again all all this is according to Dimensional Fund advisors. So according to the paper that they put out, and this is based on the Russell 3000 index. Okay? So the Russell 3000, a lot of you have heard of the s and p 500, the top 500 companies. The Russell 3000 is just the top 3000. I think the Russell 3000 is a really great index to follow because it doesn't just have large companies in it, in the US it's also encompasses some medium and small size companies. 'cause when you get down to company number 3000, those are smaller companies.
But if you would've invested a thousand dollars in the Russell 3000 in 1999 and you've invested all the way through the end of 2023, Nik. Yeah. What would your money have grown to annually or total? Total a thousand dollars invested. What's it worth at the end of 2020? Oh wow. 20 years. I'm gonna say 25 year period. 2500%. I don't, no. Wait. Whoa. Yeah, that was crazy. Well, that's two 50. That's, that's how your portfolio did. Yeah. I mean come on. We're just regular people here. Just threw on an extra zero there. I'm gonna say 250. Wow. Okay. So the dollar amount though. So a thousand dollars invested grew to $6,449. So I botched that. What would that even be? Yeah, it's okay. Well here, I'll, I'll give you a chance to redeem yourself. Yeah. So here's the crazy, so again, that's a 25 year period. So think of this, your money grew from a thousand to $6,449. So a six and a half fold growth in your portfolio. What happens if you would've missed just the best week? So 25 years. Okay. Wow. And you missed just the best week, which actually in this case, I'll tell you, was the week ending November 28th, 2008. So kind of that financial crisis era that was fun. How much would your investment be worth instead of 6,449, if you just missed that best week 6,449. I'm gonna say 6,200, maybe you missed a couple hundred bucks.
Yeah, that, that's what I would guess too. $5,382. So Wow. Instead of having 6,449, you only have 53 82. And I'll just, I'll, I'll skate through the rest of these really quick. If you missed the best month, which was the month ending, April 22nd, 2020. So kind of again, and think about this. This is that crazy covid area. The world's ending. Yeah. So remember what was happening in April 22nd, 2020, like we we're still at home locked up and, and like the world is falling apart in front of our eyes. But if we would've missed that month and not invested during that month, instead of having, again, I'm just gonna call it, you know, roughly 6,500, we have 51 50. Instead, if we miss the best three months, which was the three months ending, June 22nd, 2020, our investment is only worth 4,546. And then if we bi miss the best six months, and again six months seems like a long time, but we're talking about 25 years of performance and you missed just the best six months, which was ending the six months ending September 4th, 2000, 2009. So again, financial crisis world's falling apart. You only have $4,185. So we've heard this stat about not trying to time the market. Yeah. You know, most investors have heard that over and over and over, but like this is, I mean this is like the data behind it. Yeah. And why it's important.
And the way I, the way I think about this is like, think of it like you're surfing. Okay. So you're surfing and you're thinking, hey, I wanna catch that wave, that wave that's gonna just make my portfolio grow and you know, I'm gonna just surf right into retirement. Right. You can't be on the sidelines. So if you think about these time periods, all these time periods we talked about were happening during COV or the global financial crisis, things are a mess. I mean, you're looking out at that ocean going, wow, like that looks crazy out there. You can't sit on the beach and then wait to see that wave and say, okay, I'm gonna hang out on the beach here nice and dry and warm. Yeah. And then when I see the wave, I'm gonna grab my board paddle out there. Yeah. And do all that in time to catch that wave. It doesn't work that way. You kind of just have to be out there and then before you know it, that wave just pops up and you're surfing. Yeah. Right. Yeah. And that's a great point. And that's the same way with investing. So I think that's a kind of a good analogy to think about that.
I think Covid was a really good example of that because if we think back to when the whirlwind to shut down, you know, pull up an s and p 500 chart and you'll see 2020, it's just like a hard line straight down, boom. Huge. Yeah. Recession. Yeah. Right. And there were a lot of people that probably thought like, wow, markets are tanking. I should go to cash, I should get out of the market. But the problem that a lot of people had that made that decision was when do I then get back into the market? Yeah. Because it came and rebounded so fast. I think it was like the fastest rebound of any market ever. Yeah. That if you're trying to time when to get out or in, you could have missed such a fast movement in such a short amount of time. Like that beach analogy is perfect. Yeah. It, it's, it was nuts. So, okay, so number two. So I'm gonna go, in order of least surprising to most surprising, CI will tell you number three, Nik and I had to re we didn't even believe it. We're like, no way. So anyway, that's number three. But number two, chasing past performance. So let's say you say, Hey, alright, I get it.
I'm not gonna try to time the market, but what I'm gonna do is I'm gonna try to build a portfolio based on looking at all the things that have done really well. Yeah. And I'm just gonna buy those, right. Because we all know that when you invest, you should buy low and sell high, right? Yeah. But when we chase past performance, we're actually not doing that. We actually can kind of be buying high. Yeah. Right. Yeah. 'cause you're just looking at the thing. So, but I will say the number of people that, you know, I hear this all the time, and it's a common mistake investors make where, okay, let's say that you're, you have a 401k at your company and you're trying to figure out what investments to pick. So you just look at that list, you know, it's like, oh, here's all the investments I have in my 401k. I'm just gonna, I, and you're like, okay, I know I should be diversified, so I'm gonna pick, you know, five funds. And you just basically pick the five funds that all had the best performance, right. Over the last whatever, 1, 3, 5 years. That's actually not a great strategy. So here's a very, and I have seen this statistic before and again, the, the most recent one we're siting is, is from Dimensional funds. But you, you might be surprised to hear this.
So if we look at, and again, this is just the last 10 years. Okay. So I, I, I like these more recent numbers. So if we look at the last 10 years, okay, so this is US stock funds. Okay. So if you look at all of the mutual funds that we're investing in US stocks, so this excludes international. Okay. And you say, okay, I'm gonna look at all the funds that performed in the top 25% over the previous five year period. Okay. So rolling five year periods. Yep. So the top quartile, you're like, you look at all these funds, you're like, all right, I'm just, I'm gonna look at every fund and I'm gonna say, okay, I'm only gonna look at the top 25%. What percentage of those funds do you think remained in the top quartile for performance over the following five years? Yeah. I mean, if you're in the top 25%, you're doing things right. 'cause there's a lot of funds out there. And I imagine that if you're, you're swinging big, you're probably doing that consistently. So I'm gonna say 70%. Yeah. Only 22%. That's wild. Yeah. So, and same thing Nik. I I reason would suggest you're like, okay, if you're able to, like, again, this isn't one year. So you're like saying, okay, I'm, I'm looking at funds that have been able to do it over a five year period. That's a pretty long period of time.
These funds must be doing something right. Yeah. Right. The fact is that if, you know, again, if you look at this is, this is 2013 to 2023. And again, I, I like this stat because I've seen this stat over and over and over, over multiple time periods. And the numbers all tend to be roughly the same. But even if we look at the last 10 years, 2013 to 2023, only 22% of US stock funds that were in the top quartile for performance over a five year period remained in the top quartile over the following five years. Okay. Yeah. If we look at bond funds in the US, pretty similar. 31% stayed in the top quartile. Okay. So in general, an investment strategy that involves just looking at what did well might not be your best method moving forward. And again, today we're talking about common mistakes. But next episode we'll talk about, well then what do I do? Yeah. Yeah. Okay. How, how should I do it? I wonder if, do you have any stats on how long they stay in that top? Like those, if you take those 22% that, you know, did repeat it, how long they were in there? No, that would be a good thing to, we, somebody should do some research. So the 22% that did remain in the top quartile. Yeah. Yeah. No idea. Yeah.
Wait, I, I've been putting you on the spot, so I guess it's fair for you to put me on the spot. Yeah. But you on a spot. Yeah. That's so interesting though. We'll, we'll get our research team on that. Good. Yes. Okay. So the last stat, the last mistake, and again, this is kind of in a similar vein, but again, was very surprised to see these numbers actually. So kind of a along the same lines as chasing past performance, focusing on the headlines. Okay. That, that's another mistake that investors make. And especially nowadays, because so many of the headlines in the news are they're there to grab our attention. It drives me crazy. Like I, I, you know, right now we got CNBC on in the background here of the office. Yep. And you know, I'll, I'll, I'll typically come in and I, I don't know, I just like to have something to kind of distract me. So, you know, over, over the years I've had CNBC on while I'm sitting here working away in the office, I've noticed kind of an interesting pattern and it's kind of funny 'cause whenever you have the market up one day, you know, let's say it's up pretty big that day, it seems like it's a parade of guests that are like talking about why it's up and why it's gonna keep going up. Yeah.
And why the Dow's gonna go to a hundred thousand in the next, you know, two years, right? Yeah. And then on a down day it's guest after guest talking about why things are gonna tank Yeah. And why the market's about to have a 30%, you know, downturn it. Yeah. You never hear someone coming on the news and be like, you know what? I don't know. I couldn't have guessed it. And we'll probably have another day of tomorrow. I don't know. Right. Do you know? Right. And that, that's, that's what they should say. It is like, Hey, do you know what's gonna happen? Nope. No idea. Today's news, the market did something we didn't expect and it'll do it again tomorrow. See you, then you need to start a news channel, Nik. Yeah. That's okay. So paying too much attention to the headlines can, can be another mistake investors make. And again, when we saw this statistics, it, it was, it was quite surprising. So especially right now, so right now, the big thing going on the headlines is the magnificent seven. Right. And so sometimes investors, they might be become enamored with popular stocks just kind of based on how they've done recently or attention they're getting from the media. Right. And then sometimes investors can make the mistake of having their portfolios too concentrated in those companies. Okay. So pop quiz, can you name the Magnificent seven?
Well, normally, so I've been talking about the magnificent seven to clients quite a bit. Yeah. I mean, if you're listening to the podcast, you've heard us talk about it a bunch. Yeah. And I, I usually can nail five or six of 'em. Yeah. And then for whatever reason, I figured there's always that last one or two, seven. Yeah. But yeah, I just so happen to be looking at a list. Oh, okay. So it's cheating. But the people on the podcast might wanna know Alphabet, Amazon, apple. So, so here's the lesson from that. If you're gonna start a company, it should start with an A true, I mean Apple, Amazon, apple, I mean I just go aardvark it's two A's or an M Meta Microsoft. Yeah. And then you have NVIDIA's the seven, or sorry, six and then Tesla. Okay. So those are the magnificent seven. Okay. So very interesting stat. Now this one does go all the way back to 1927. So if you look at stocks, so these are individual stocks now not mutual funds. And you go back from 1927 through the end of 2023, the per. So what this, what this stat looks at is it's like a hundred years. Yeah. How do companies perform when they're on the way up and then once they kind of hit that, you know, that top 10%. Yeah.
So this stat looks at performance of companies that grew to be one of the largest 10 companies in the US stock market. Okay. Okay. So from 1923 through the end, I'm sorry, 1927 through the end of 2023. And again, this is according to the paper published by Dimensional Funds on February 22nd, 2024, the average performance. So again, this looks at any company that made it into the top 10. Okay. So if you look at that, that history of almost not quite a hundred years, every company that cracked the top 10 at any point during that almost a hundred year history, the 10 year average performance of that company leading up to that, you know, making the top 10 was 11.8% per year. The five years before they hit the top 10, their average returns were tw 20.0. So exactly 20% per year. And then the three years before they cracked the top 10, their average annual performance over that three year period was 27.2% per year. So they're just, they're getting faster and faster as they're approaching that. Yeah. Top 10%. Yeah. And that would make a ton of sense. 'cause hey, in order to crack the top 10, that means you got a long ways to go, they're doing well. Yeah, yeah. Yeah. Nvidia is, is kind of the prime example of this right now, Nvidia now is in the top 10.
I don't know exactly what number they are today, but a few, like they, a few years ago, like no one Yeah. They were making stuff for video games or something. Yeah. Unless you're a gamer, you didn't know what Nvidia was. Yeah. And now they're, they're probably like number one or, or not number one, but like two or three. Yeah. They're up in, but I mean like what do they do? Do you know, can you ex I mean they're, they're tied to AI is why they've grown so much. Yeah. They make processing chips that you need like a ton of processing power to run these ai. In the past it was like they're just running video games, but now they're like, Hey, we're actually, we're gonna run brains. Pretty smart person running that company. Yeah. Yeah. Okay. So what happens once they hit the top 10 though? I mean they, this is nuts. You gotta keep going, right? Yeah. I mean, well, and again, and look, we're looking at this going, okay the companies, and this is where I do think we need to look at the stat and take it with a grain of salt because you know, hey, we're looking at companies now like Google, apple, Tesla, I mean Yeah. Like are we suggesting that those companies are not gonna continue to do well? Yeah, no.
'cause obviously like there's a lot of really good things happening around AI and some of these things, but this is just kind of an interesting stat to realize like, this is why no matter what we think that hey, staying diversified and not getting too enamored with some of these headlines can be a good idea. Because again, this is looking at every company over the last almost a hundred years that's cracked the top 10. Okay. A lot of the companies that have cracked the top 10. So if we think about what was the top 10, 10 years ago, I don't even know it wasn't what it is today. Yeah. But I think, you know, there were companies like Exxon and you know, probably some banks in there back then. Right. Okay. So once the company hits the top 10, if you look at the performance starting the first calendar year after they're in the top 10. Right. So let's say a company hits the top 10 today. Yeah. Okay. It would basically be their performance starting January one of 20, 25. 20. Yeah. So the following calendar year after hitting the top 10, the average performance of those companies over the following three years after hitting the top 10 was a half a percent per year for three years. For the five years after it was negative 0.9%. And for the 10 years after it was negative 1.5% per year. Wild. Yeah. It's like a little bell curve.
Yeah. Or no, it'd be like a, it just flat line once it gets to the top and maybe come dip down just a little. Yeah. So that was crazy to me. Yeah. 'cause I think again, human nature, we would think, oh yeah, like these companies are crushing it. But I, I started to think, and like just over the course of my career, I think about, you know, like, again, we have companies like the, the top 10, 10 years ago is not what it, what not what it is today. And you know, there's been a lot of change. So again, it doesn't mean, does it mean once a company hits the top 10 you should sell? No. Because again, we have to realize that there were a lot of outliers in that stat. Yeah. But as a whole, things change. And it just speaks to like why being diversified no matter how great the headlines look. Yeah. That you should make sure that you don't get too enamored with any one company or any one sector. 'cause you just never know. Yeah. Yeah. And I think that like, can even kinda accentuate that point of number two where you're talking about of like buying high, selling low.
Like if, if you're reading the headlines and you're like, oh my gosh, NVIDIA's absolutely killed it, I should probably get in now that it's at the very top, it's there's, there's a chance to say like, it may not keep doing that. Yeah. Like don't time the market. Yeah. So there you go. Yeah. So three mistakes. One, trying to time the market, two chasing past performance, and three being too focused on headlines. Those are things to avoid. Yeah. And next episode we're gonna shift to what you should do. I'm excited for that. Yeah, yeah, me too. Because we're still working on it. Yeah. Gotta figure out what to tell you what to do. I can't wait. Alright guys, thanks for tuning in and we will see you next time. The opinions expressed in this podcast are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual or specific security. It is only intended to provide education about the financial industry to determine which investments may be appropriate for you. Consult your financial advisor prior to investing. Any past performance discussed during this program is no guarantee of future results. Any indices reference for comparison are unmanaged and cannot be invested into directly. As always, please remember, investing involves risk and possible loss of principal capital. Please seek advice from a licensed professional. Momentous Wealth Management Inc. Is a registered investment advisor.
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