Do You Make These Investment Mistakes?

The market is volatile, interest rates are falling, inflation is rising, and the Delta Variant is surging.  The Dow Jones fell 725 points on Monday, but it rebounded 549 points on Tuesday. The US 10-Year Treasury yield dipped to a recent low of 1.13%, despite the inflation rate touching 5.39%. And in Florida, COVID cases are climbing again. As headline risks multiply, you may be prone to make some forced errors that could impact your financial future.

Do you make these investment mistakes?

  • Do you panic when stocks fall 1% to 2%? It isn’t easy to create wealth if you sell every time stocks fall. Panicking is a wealth killer. Rather than selling stocks when they’re down, use it as an opportunity to buy great companies at lower prices.
  • Do you participate in your company’s retirement plan? If your company offers a retirement plan and you don’t participate, you’re leaving tens of thousands, if not millions of dollars, on the table. You’re allowed to contribute $19,500 to your 401(k), and if you’re fifty or older, you can add another $6,500. Investing $19,500 for forty years can grow to more than $4 million by the time you’re ready to retire. If you can’t afford to max out your retirement plan, then contribute whatever you can – every bit counts.
  • Do you match the match? If your company offers a 5% match to your 401(k), but you only contribute 2%, you’re missing an extra 3%. If your salary is $100,000, then 3% is $3,000 per year, which can add up to more than $600,000 during your working career.
  • You are not contributing after-tax dollars to your 401(k) plan. If you max out your 401(k) contributions, you can contribute to an after-tax account if your employer allows it, substantially increasing the amount of money in your retirement plan; in some cases, you can add an extra $38,500 per year. Some call this strategy the mega back door Roth.[1]
  • Are you too conservative? If your time horizon is ten years or more, own stocks. According to Dimensional Fund Advisors, stocks made money 95% of the time over continuous ten-year rolling periods from 1926 to 2018 and produced an average annual return of 10.4%.[2]
  • Are you too aggressive? Investing in stocks when you need money in one year or less is a mistake. In the short term, stocks are violent, volatile, and unpredictable. If you want to buy a home, pay for a wedding, or take a trip in one year or less, park your money in cash or bonds.
  • Are you impatient? Creating wealth requires patience. It can take years or decades for your wealth to grow, so don’t get impatient if you don’t experience early success.
  • You aren’t diversified. Diversification is considered the only free lunch on Wall Street. If one investment zigs, another will zag. Asset allocation accounts for 93.6% of your investment return. The remaining 6.4% comes from market timing and investment selection.[3]
  • Ignore small-caps. Small-company stocks outperform large-company stocks. The Dimensional U.S. Small Cap Value Index averaged 13.1% from 1928 to 2020. A $1 investment is now worth $92,668.  The Dimensional Large-Cap Value Index averaged 11%. A $1 investment in this large-cap index is now worth $17,022.[4]
  • You attempt to time the market. Timing the market is impossible. If you invested $1,000 in the S&P 500 in 1970, it grew to $139,000 at the end of August 2019. However, if you missed the 25 best days from 1970 to 2019, or 18,139 days, your investment only grew to $32,763.[5]
  • You are investing with active fund managers. Passive index investing is better than active stock picking. The Standard & Poor’s study of passive vs. active reveals that over 15 years, 95% of active fund managers fail to outperform their benchmark, also the case for 1, 3, 5, and 10 years.[6]
  • You are only investing in US stocks. International stocks account for 43% of the world’s equity market capitalization, and if you only invest locally, you’re missing half of the world’s best investment ideas.[7]
  • You are not rebalancing your accounts. If you rebalance your portfolio, you’ll keep your risk level and asset allocation intact.
  • You are not automating your investments or payments. Automate everything like investing, paying your bills, and rebalancing your accounts. Reducing human error can improve your odds of financial success.
  • No Financial Plan. According to one study, individuals who complete a financial plan have three times the assets of those who do little or no planning.[8] Investing without a financial plan is like building a home without a blueprint. Good luck.
  • You are not working with a financial advisor. A study by Vanguard quantified an advisor relationship can add 3% in net returns.[9] An advisor can help with financial planning, estate planning, investment planning, charitable planning, and much more. 

We are our own worst enemies when it comes to investing and creating wealth. If you create a financial plan, diversify your assets, rebalance your accounts, invest often, good things can happen.

Happy Investing!

It’s good to learn from your mistakes. It’s better to learn from other people’s mistakes. ~ Warren Buffett

July 21, 2021

Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level. PWM’s custodian is TD Ameritrade, and our annual fee starts at .5% of your assets and drops depending on the level of your assets.

Note: Investments are not guaranteed and do involve risk. Your returns may differ from those posted in this blog. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation. Options involve risk and aren’t suitable for every investor. Happy anniversary to my parents – 58 years today!


[1] https://www.wsj.com/articles/a-little-known-back-door-trick-for-boosting-your-roth-contributions-11625848733, Anne Tergesen, July 9, 2021

[2] Dimensional Fund Advisors 1926 to 2020

[3] Determinants of Portfolio Performance, Financial Analyst Journal, July/August 1986, Vol 42, No. 4, 6 pages; Gary P. Brinson, L. Randolph Hood, Gilbert L. Beebower.

[4] Ibid.

[5] https://my.dimensional.com/what-happens-when-you-fail-at-market-timing

[6] https://us.spindices.com/documents/spiva/spiva-us-year-end-2016.pdf

[7] DFA 2021 Matrix Book

[8] http://www.nber.org/papers/w17078

[9] https://www.vanguard.com/pdf/ISGQVAA.pdf