The Biggest Investment Mistake You Make

Posted on September 9, 2016 at 12:40 PM PST by

We live in a world that’s predicated on taking action. You want a job, go knock on doors. You find someone attractive, express your interest.

No pain, no gain, as they say in the gym. But what if the biggest investment mistake you make is the one thing that works in all of your other endeavors in life?

What if taking action is the problem, not the solution?

investment mistake

There’s a lot of data to back up this idea. As John Bogle, the founder of the Vanguard Group, famously put it, “Don’t do something, just stand there!”

Bogle is talking about the remarkably high premium that gets attached to taking action on your investments when action is not warranted. Truth be told, that’s close to all the time.

The bulk of the gains you will experience in an investment portfolio will happen whether you do something or not. Stocks have a propensity to rise over time. Dividends are paid out quarterly and reinvested with no effort, if you set them up that way.

If you’re in a workplace retirement plan and use your 401(k) or 403(b) properly, that’s automatic, too. An amount of cash comes out of your check on a pre-tax basis. The company likely adds a matching amount.

And it gets invested into your portfolio with every pay period, all year. If you buy even dollar amounts, you get the advantage of dollar-cost averaging. When stocks dip you get more for your money, essentially.

Owning the cashflow and growth that comes from the stock market is exactly what Bogle means by “just stand there.” He absolutely detests trading and finds it a huge waste of time and money.

In part, that’s because of the costs of trading, which sap your total return over time. The other problem is the likelihood that you will guess wrong and end up buying at a higher price while selling at a lower price.

Three simple steps

Buy high, sell low. See what’s wrong with the picture?

The only actions you need to take for long-term investing are these three steps. They are easy and anyone can do them. If you can operate a computer and type some numbers, no need to watch CNBC or hit up your friends for stock ideas.

In fact, the less you do that, the better. Here are the three steps:

  1. Open a tax-deferred IRA
  2. Buy a risk-adjusted portfolio
  3. Rebalance it periodically

And that is it! If you can manage these three steps, you will get a better annualized return than 99% of your friend and better than 90% of those highly paid Wall Street traders taking fees out of your account.

Couldn’t be simpler or cheaper, so long as you just stand there.

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