Episode 18: Common Investing Mistakes

Isaac Wright: Hey, welcome back to Wright Money Tips. I’m Isaac Wright. We’re going to have a really nice conversation today around investing mistakes. You know, a lot of us, whether we are do it yourself investor or maybe we’ve hired somebody to help, there are certain mistakes that we see day in and day out when it comes to let’s call it, just making it easier on yourself long-term especially with accumulating your assets and obviously having that money available to you in the future. But today we have our guest, Aaron Reed. Aaron, welcome to the program.
Aaron Reed: Thanks. Good to be back.
Isaac Wright: We’re going to jump right in here because again, whether you’re a seasoned veteran when it comes to managing your own investments, maybe you’re just getting out of the gate or somewhere in between, we have a few things we want to teach and talk about related to mistakes that a lot of people make. So, first thing I want to talk about today, Aaron is what I call: investments that have no purpose. Let’s shed some light on this for our listeners today. A lot of people arbitrarily have money sitting in cash stocks, mutual funds, but really have no direction or maybe even no goals around that.
Aaron Reed: Yeah. It’s important that each piece of an individual’s portfolio serves a purpose. People will accumulate those things over time. It may make perfect sense for them to own those certain asset classes. But, if they don’t know exactly what purpose it’s serving or how it fits into their overall plan, maybe it doesn’t fit them as well as they think it does. But the key takeaway is just to make sure that everything you own has a purpose and it fits into your plan in a certain way.
Isaac Wright: Well, and I think maybe from a time horizon perspective, that really comes into play. We find people that have owned investments for maybe years or arbitrarily have grown an investment amount to be a decent amount of money, but the level of what I would call direction around that money of how to use it, when to use it, we’ll talk a little bit about risk here in a second. But just the fact that for a lot of people that have money, especially in like 401(k)s and stuff where maybe they’re not directly looking at it every day, every week, what have you. It’s just something to pay attention to for all of you today.
Number one is making sure that in the realm of your investments, that you do have some definitive purpose around where that money is going to be used and maybe what goals that is going to be surrounding those dollars.
Number two, I had on my checklist for all of you today is what I call again, we talked about this before, not understanding risk. Listen to what I just said. I’m not talking about taking risks. Everybody has to take some level of risk in their investments. But not understanding risk itself. And, Aaron, why don’t we just kind of go off on that a little bit here. Talk to me about what you find when you hear that not understanding risk phrase?
Aaron Reed: So, to me, I see it a lot of times that people may kind of just on the surface, they might not understand exactly how much risk they’re taking on. Maybe what they own, they may not understand it as well as they thought they did, maybe they do. But I see it a lot where someone just doesn’t. They, a lot of times people might be a little more aggressive than they think they are, or they could be more conservative than they think they are. But it’s just important to understand how much risk they’re taking on. Also, it’s important to know that there are other types of risk out there other than just marketing. Even if you’re sitting in cash, you’re still taking a risk. It may be a different type of risk. There’s what, 5, 6, 7 different types of risks out there and it’s just important to know each one, be aware of it and know where you fall on the spectrum for each of those.
Isaac Wright: I think a great example of what you just brought up is applicable for right now. People sitting in cash, for example, well you’re taking on right now inflation risk because every time you go to the grocery store, every time you go to the gas pumps, you’re noticing that that dollar is not quite going as far as it did, maybe six months, 12 months ago. I mean, that is a great definition of risk that has nothing to do with the stock market going up and down. And also I would say this, sometimes, and I’m not saying this to be negative of our industry, but sometimes you may have been misled about how risky a certain investment may or may not have been.
We’ve seen people that have invested in what’s called non-liquid REITs, or Real Estate Investment Trusts, where they felt, they were explained that they were going to make a certain rate of return that could have been let’s call it highly probable and unfortunately, some of those went defunct. You know, there’s always negative aspects of investing, but I think being a fiduciary here at our firm, and of course in general, we are always going to cover the pros and cons correctly with you. If you’re uncertain of what risk looks like when it comes to your investments, of course, we can have a conversation with you.
Let’s move on to what I would say right now is, not to say it doesn’t happen all the time, but I think right now is a pretty interesting time in the market, especially how things have grown so fast, but emotional decision-making when it comes to your investments. That is a classic mistake. But let’s define what happens when people make emotional decisions and what we try to do, to let’s call it, reduce that probability.
Aaron Reed: Yeah, absolutely. A lot of times, you know, everybody knows the old adage, “Buy low sell high.” It’s not quite that easy. When emotions get involved, a lot of times people make some kind of knee jerk decisions whether they buy something on a whim or whether they get nervous and they sell everything on a whim. A good advisor can just kind of help take those insights and emotions off the table a little bit. And, and I know everybody’s probably seen the statistics of how someone who works with an advisor does X percent better than someone who does it by themselves. And a lot of that can be attributed to just taking that emotion out of it.
Isaac Wright: I think that right now, because people have been so conditioned for the market to do nothing but go up over the last almost 10, 10 plus years now, that like when March of 2020 happens. So, I don’t mind sharing this and Aaron and I have talked about this too, in our firm here, we didn’t have too many phone calls through that downturn of 2020 in March where the market dropped basically 30 plus percent in a year.
Many people were thinking about getting out of the market and therefore, the few that decided to do so, even against our recommendations. People have to realize it’s your money and we’re here to help advise. But how do you get back in and when do you get back in? And a lot of people didn’t get back in until the market recovered a substantial amount. So, they kind of got hit on both sides of the fence. And that’s probably, again, how understanding the time horizon of your investments can help eliminate some of that emotional decision-making.
So, I probably would say on the opposite end here, another classic mistake that we find are hot tips. You talk to the neighbor, you’re at the social function, you have a friend that has more money than you. So, you automatically feel like they know more. Let’s talk about that because as crazy as it is, people still have a little weight towards sometimes hearing those hot tips.
Aaron Reed: Yeah, that’s true. A lot of times, like they say, when you hear something that’s too good to be true, a lot of times it is. Worst case scenario, you could be dealing with someone who might not have your best interests at heart and might be doing something that’s not on the up and up. I’ve seen that before. Somebody is making great returns through a friend. Turns out, that friend wasn’t doing things exactly the way they should have been doing them.
Also at the same time, usually those hot tip things are highly speculative to say the least. And that’s going to carry a lot of risks. So, while a lot of our clients might have a small little account over here that they like as their home run account, like we say, that they might want to do a little speculating with. But when it comes to managing your retirement income and your wealth, you probably don’t want to be basing it on a hot tip.
Isaac Wright: And so, you know, just keep in mind because it’s interesting as you climb the wealth ladder, you normally associate with people that also have a lot of money and therefore a lot of influence. And that’s not to say that you’re always going to get bad advice if somebody gives you a tip, but you have to put that in the perspective of how much risk are you willing to take and maybe having an advisor that can be somebody that can, again, moderate, some of that decision making. It could be very impactful, especially with money that you may wind up needing sooner than later.
Let’s wrap up here today, Aaron, with one final classic mistake. We recently in the last two weeks, had two families come in to see us not understanding their fees. Let’s talk a little bit about fees because right out of the gate, I want to say here at our firm, we have fees and we’re going to disclose them to you. We’re going to walk you through the value proposition of why you pay, what you pay. A lot of people are still investing with advisors or in the industry in general, and not really understanding their fees if they own an investment or insurance product.
Aaron Reed: Yeah, I think across the board, that’s probably one of the shortcomings in the financial service industry. You know, I would say probably eight out of 10 new meetings I have with people when I ask what they’re paying in fees and how they’re paying, they usually don’t really understand. They might have an idea, but it’s usually that they just don’t understand. Sometimes it’s not as true, maybe their advisor isn’t being as transparent, but a lot of times it’s just that people might not be paying attention to it, might not remember it. I’m not saying that they’re always being misled. But it’s just, sometimes it’s even kind of complicated on how the fees work on different investments. But I think across the board, by and large, a lot of people just don’t understand what they’re paying for and. I take great care and I want to make sure that all of my clients understand exactly what they’re paying and what they’re getting for that fee that they’re paying.
Isaac Wright: Well, you, and I’ve worked a lot on our value proposition. You know, when we moved into our new office here up in Midlothian, we really took it up a notch in terms of that level of transparency. But more importantly, is continuing to build out what people value today. Which is not just financial advice but lifestyle advice, estate tax, there’s a whole litany of things that people need to consider, especially when they start moving in and transitioning into either retirement or a different place in their work. So, these are just notes that I had put together that Aaron and I wanted to discuss today on the program. Classic mistakes that even if you are a do-it-yourself person, or if you have an advisor, but maybe not say necessarily have that engagement level. I would encourage you to just maybe take a minute, reach out to us. We’re happy to talk to you.
Aaron, I think today was short and sweet, but definitely good for people to pay attention to. So, we look forward to having you on the next episode of Wright Money Tips. Take care, and we’ll talk to you soon.
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