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Speaker 1: Bloomberg Audio Studios, podcasts, radio news.

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Speaker 2: We're attracted to complex ideas, maybe because they sound sophisticated

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Speaker 2: and smart, but when it comes to your money, simple

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Speaker 2: beats complex. The more complicated an investment approach is, the

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Speaker 2: more error prone it tends to be. Even the best

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Speaker 2: strategies can be undone with only one mistake. I'm Barry Ridolts,

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Speaker 2: and on today's edition of At the Money, we're going

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Speaker 2: to discuss how to keep it simple and avoid the

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Speaker 2: most common mistakes investors make. To help us unpack all

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Speaker 2: of this and what it means for your finances, let's

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Speaker 2: bring in Peter Malukey as the CEO of Creative Planning,

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Speaker 2: which manages over three hundred billion dollars. Peter also wrote

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Speaker 2: two books coincidentally on these exact topics, The First five

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Speaker 2: Mistakes Every Investor Makes and more recently, Money Simplified. So Peter,

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Speaker 2: let's start out with complexity. Why are we so attracted

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Speaker 2: to complex, sophisticated sounding solutions.

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Speaker 3: Well, I think for two reasons.

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Speaker 4: One, it makes it easier for someone to sell Hey

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Speaker 4: this is so hard, you really need me. Only I

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Speaker 4: can help you and save the day. And it makes

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Speaker 4: it easier to buy. People want to believe that they

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Speaker 4: can be better at something, and so the harder something sounds,

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Speaker 4: the more complicated it sounds, the more it sounds like

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Speaker 4: the person really knows what they're doing, the more inclined

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Speaker 4: I am to buy it, you know, and investing. If

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Speaker 4: you come at somebody and explain, hey, I for this

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Speaker 4: part of your portfolio, which would just be really simple,

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Speaker 4: you don't get wonderful from people. Usually they don't go, oh,

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Speaker 4: that's awesome, Peter. They go, wait a second, you mean

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Speaker 4: you're telling me that, Like, it's just I did something

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Speaker 4: seems wrong. I thought you were really sophisticated, Peter. Why

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Speaker 4: is this recommendations so straightforward?

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Speaker 3: You know, it's not human nature? Huh?

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Speaker 2: Really interesting? So tell us what are the advantages of

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Speaker 2: keeping it simple?

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Speaker 4: Well, I think the advantage of keeping it simple is

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Speaker 4: that investing tends to reward simple. Not always, but I

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Speaker 4: think a good rule of thumb is make it as

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Speaker 4: complicated as it needs to be, and no more complicated

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Speaker 4: than that. Like every now and then you could add

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Speaker 4: something incremental. It might even actually help a little bit,

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Speaker 4: but you're not accounting for the hassle and the work

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Speaker 4: and the paperwork and a separate tax form and all

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Speaker 4: this stuff that you're going to have to do. Think

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Speaker 4: about your goals and say how do I accomplish these.

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Speaker 4: I don't want to do anything that doesn't add incremental

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Speaker 4: value and eat. I also don't want to do things

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Speaker 4: that add very tiny incremental value relative to the other

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Speaker 4: hassles it brings to me.

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Speaker 2: So the book Five Mistakes Every Investor Makes lists a

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Speaker 2: number of eras. Let's work our way through them and

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Speaker 2: see if we can figure out how to not make

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Speaker 2: these mistakes. Starting with market timing. How hard can that be?

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Speaker 2: You sell right before the market crashes, and then at

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Speaker 2: the bottom you jump right back.

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Speaker 4: I know it so straightforward that talk about something that's

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Speaker 4: very easy to sell. That's a very very easy thing

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Speaker 4: to sell because everybody wants, okay, I would be the

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Speaker 4: stock market when it goes up, and you've got these

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Speaker 4: special signals that will get me out before it goes down.

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Speaker 4: I mean, look, some of the biggest money managers in America,

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Speaker 4: that's what they're selling, right, And you know, look they're

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Speaker 4: wrong most of the time. It doesn't take a lot

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Speaker 4: of research to figure it out. But by goodness, it's

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Speaker 4: easy to show. Now, what we do know is that

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Speaker 4: if you buy, if you have an active managers a trader,

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Speaker 4: you compare them to the index. Just say buying the

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Speaker 4: S and P five hundred of the US or an

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Speaker 4: international index that over a decade, over ninety percent of

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Speaker 4: them will underperform the index.

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Speaker 3: Right, And so in this case.

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Speaker 4: More cost effective is and simpler is a better outcome.

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Speaker 4: You're not sacrificing making that simple move.

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Speaker 2: So you mentioned active management, let's talk about active training

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Speaker 2: a related issue.

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Speaker 3: Again, not that hard.

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Speaker 2: Just buy good stocks that go up, and when they

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Speaker 2: stop going up, sell them, right.

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Speaker 4: You know, it's most people are surprised to know that

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Speaker 4: most US stocks over their lifetime underperform the treasury. It's

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Speaker 4: very few stocks that really do well. They tend to

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Speaker 4: lift up the market. Like if you think today, what's

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Speaker 4: lifting the SMP five hundred companies like Nvidia, and a

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Speaker 4: couple of years ago was Apple, and years before that

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Speaker 4: it was Southwest Airlines and Monster Energy. And it always

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Speaker 4: seems obvious through the rear view mirror. It's not the reason.

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Speaker 4: One of the reasons that indexes does so well is yeah,

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Speaker 4: some of the stocks go to zero, but you could

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Speaker 4: only have a stock go down one hundred percent, you

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Speaker 4: can't go down one hundred and one percent, but a

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Speaker 4: stock can go up ten thousand percent. So an Apple

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Speaker 4: or an Nvidia, or a Southwest Airlines or a Monster

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Speaker 4: Energy can offset dozens and dozens and dozens of failures.

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Speaker 4: Like Bogel said, you don't need to look for the

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Speaker 4: needle in the haystack. Just buy the haystack, and you

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Speaker 4: wind up lifting up the return. So people who are

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Speaker 4: doing security selection, they wind up with a lot of

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Speaker 4: those stocks that tail that trail the treasury. They wind

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Speaker 4: up missing the needle in the haystack. And that's why

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Speaker 4: the active trader, among other reasons cash drag, expenses, taxes, underperforms.

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Speaker 2: Huh. Really interesting. So you talked about costs and taxes,

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Speaker 2: you haven't discussed the emotional toll.

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Speaker 3: And I know you've.

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Speaker 2: Discussed this in the past. You know, for people who

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Speaker 2: are either actively trading or market timing, what is the

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Speaker 2: emotional toll not just the commitment in time, but emotional energy.

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Speaker 4: Yeah, that's really I mean, that's an interesting insight because

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Speaker 4: I think that that's the biggest price people pay, is

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Speaker 4: not the monetary price unless they're devastated every time and

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Speaker 4: you see somebody get economically devastated, it's that's that's obviously

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Speaker 4: a tragedy. But most people they just kind of learn

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Speaker 4: a lesson, right, they lose more money than they should have,

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Speaker 4: or they don't perform as well as they should have.

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Speaker 4: And it's really the emotional toll that you point out, Barry,

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Speaker 4: that really becomes the true negative side effect of being

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Speaker 4: so actively engaged in this emotional roller coaster and absorbing

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Speaker 4: all of this news and thinking you've got a narrative

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Speaker 4: that you could translate into trading, and it doesn't work,

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Speaker 4: and you're up at night thinking about it.

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Speaker 3: It occupies mental space.

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Speaker 4: It's not positive, and so I think that for a

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Speaker 4: lot of people, it starts out as spun then they

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Speaker 4: think they can do it, and as you wind up

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Speaker 4: seeing that up and down, it's no different than the

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Speaker 4: emotions of being in a casino for a long period

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Speaker 4: of time. There's those moments of you four you're looking for.

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Speaker 4: But look, if you're doing it for anything but entertainment,

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Speaker 4: you're more likely to have negative energy come out of it.

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Speaker 2: So what are the practical steps investors can take to

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Speaker 2: try and prevent Some of the first couple of eras,

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Speaker 2: either overtrading or market timing or even stock selection.

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Speaker 4: Well, I think the first thing an investors should do

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Speaker 4: is figure out what are you trying to accomplish?

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Speaker 2: Right?

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Speaker 3: How much money do I need? When do I need it?

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Speaker 4: Is some of that money coming from social security or

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Speaker 4: rental property or selling my business? What do I actually

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Speaker 4: need from my portfolio? Okay, now I know what I

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Speaker 4: need from my portfolio, so I can back into how

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Speaker 4: much should be in bonds? How much would be in stocks.

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Speaker 4: My situation is a little more complicated. Maybe private equity,

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Speaker 4: private lending, private real estate for more wealthy individuals or

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Speaker 4: people that can afford the.

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Speaker 3: Liquidity, and then they're on the stock market side. Track indexes.

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Speaker 4: Get yourself out of the market timing game, get yourself

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Speaker 4: out of the security selection game. You're for sugar to

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Speaker 4: lawyer fees, You're for sugar to lawyer taxes. You're almost

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Speaker 4: certainly going to outperform the active manager.

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Speaker 2: Really really interesting, So let's talk about performance and financial information.

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Speaker 2: It seems investors hoover up everything they can, they don't

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Speaker 2: really understand their own performance, and they seem to misinterpet

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Speaker 2: a lot of financial data tell us about that mistake.

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Speaker 4: Well, I think that I think financial data is really

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Speaker 4: interesting to track, like, for example, if you look at

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Speaker 4: mutual fund returns. You can look at a ten year

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Speaker 4: return of a mutual fund and go, oh, on average,

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Speaker 4: they did really great. But the reality is that most

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Speaker 4: investors can lose money in a lot of these top

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Speaker 4: performing funds. An old examples like Mason Value right, so

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Speaker 4: Bill Miller are one of the only people, are the

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Speaker 4: only person ever I believe to beat thats and b

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Speaker 4: five hundred fifteen years in a row. Then you have

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Speaker 4: peak inflows into the fund and then they're in the

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Speaker 4: bottom one percent on tile of performance. So even though

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Speaker 4: that fund had a great history for most of the time,

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Speaker 4: the reality is most of the investors in the fund

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Speaker 4: lost money. The most recent examples Kathy would do I

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Speaker 4: find very interesting online, But the reality is are fun

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Speaker 4: a lot of money not in there when you have

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Speaker 4: these great returns, record inflows and then devastating losses. So

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Speaker 4: the average investors experience is often quite different from what

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Speaker 4: they see, and investing is filled with data that looks

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Speaker 4: like that.

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Speaker 2: Yeah, I jokingly say, if you set the course record

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Speaker 2: on the straightaway but then crash into the wall at

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Speaker 2: the curve. It doesn't count, right, So let's talk about

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Speaker 2: the really big one. Letting emotions and biases interfere with

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Speaker 2: your process. Tell us what investors do where either their

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Speaker 2: cognitive biases or just their emotions get the better of them.

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Speaker 4: I mean, it's confirmation biases is an incredible bias. I mean,

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Speaker 4: so when I was in New York City a long

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Speaker 4: time ago, maybe a decade ago, I stopped to see

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Speaker 4: our advisors, some of them, and I told him to

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Speaker 4: pick a restaurant. And they said, hey, Peter, we want

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Speaker 4: to go to a steakhouse. They said, hey, I'm you know,

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Speaker 4: headquarters is in Kansas City. Like, take me anywhere, but

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Speaker 4: a steakhouse. You know, we've got steakhouse discovered. They're like, no, no, no,

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Speaker 4: New York best steakhouses. I'm like, all right, fine, So

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Speaker 4: we go to the steakhouse we are, you know, the

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Speaker 4: waiter comes out, they're going through all the different it's.

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Speaker 3: One of those steakhouses, right, So they go through the

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Speaker 3: file at.

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Speaker 4: And then they go through the the porterhouse, and then

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Speaker 4: they go on here here. Now we've got our New

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Speaker 4: York strip.

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Speaker 3: It was just flown in last night from Kansas City.

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Speaker 4: So my takeaway was like see, and all of them

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Speaker 4: were like, look, we get the best cut from everywhere.

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Speaker 4: That's how good everything is New York. So we have

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Speaker 4: this confirmation, a bias where we look through everything through

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Speaker 4: our own lens. Most people think they're above it. Nobody is.

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Speaker 4: If you're a Republican or conservative, you might go to

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Speaker 4: the Drudge Report online. You might read the Wall Street Journal.

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Speaker 4: You might be watching Fox News. If you're a Democrat,

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Speaker 4: you might be you know, there's a lot of websites

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Speaker 4: like huff Posts that you could go to. You might

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Speaker 4: be reading the New York Times. You might you watching

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Speaker 4: CNN or MSNBC. Right, we all are looking for stuff

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Speaker 4: that just already validates what we're thinking.

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Speaker 3: All of the time.

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Speaker 4: We're avoiding stuff that contradicts us. We dismiss it, We

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Speaker 4: dismiss the person saying it. This translates into investing. I

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Speaker 4: remember word Buffin talking about when he's looking at a stock,

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Speaker 4: he doesn't just say why should I buy this stock?

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Speaker 4: He asks what can go wrong? And really say if

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Speaker 4: this fails, how did it fail? What's he trying to

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Speaker 4: do there? He's trying to conquer that confirmation bias, and

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Speaker 4: how it translates to that typical investor is he might

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Speaker 4: have somebody who has Apple today and Apple's struggling this year,

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Speaker 4: and so they might be online looking for all the

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Speaker 4: reasons it will do better right and ignoring the stories

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Speaker 4: that say it's best days are behind us. We tend

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Speaker 4: to just go search for what we want to validate,

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Speaker 4: and it's investing is very powerful emotion.

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Speaker 2: And finally, the fifth mistake you reference is working with

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Speaker 2: the wrong advisor. Let's talk about that. What is the

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Speaker 2: wrong advisor and what can people do to avoid working

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Speaker 2: with the wrong advisor?

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Speaker 4: I think to start, I just say it will help

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Speaker 4: for your listeners to understand the profession. Like, so, ninety

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Speaker 4: percent of advisers of which there's three hundred and eighty

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Speaker 4: thousand the other world's not hurting for us, right, about

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Speaker 4: ninety percent are brokers, and so that means that they

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Speaker 4: are not a fiduciary to the client one hundred percent

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Speaker 4: of the time. They don't have to be actor the

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Speaker 4: client's best interest all the time. Legally, this blows people away, right,

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Speaker 4: I think, because they think, like, oh, my doctor has

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Speaker 4: to write well, yeah, legally they have to my CPA

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Speaker 4: does right, Yes, legally they have to, and you're my lawyer,

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Speaker 4: does right, yes, legally they have to. But the advisor no.

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Speaker 4: The advisor can optionally choose to be a fiduciary, and

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Speaker 4: the majority of them optionally choose not to. They stay brokers.

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Speaker 4: So how does that translate into what it means for

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Speaker 4: the client. For the client, it means, you know, a

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Speaker 4: broker can have a take a spread on a bomb,

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Speaker 4: they can collect a commission on investment. They can participate

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Speaker 4: in what's called revenue sharing, where if they put you

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Speaker 4: in a fund, some of that money from that fund

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Speaker 4: goes back to the advisor. All of those things are

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Speaker 4: conflicts of interest. It doesn't mean every broker's dishonest. Of course,

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Speaker 4: there's many honest brokers. But if you are choosing between

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Speaker 4: and then advisor who has to act your best interest

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Speaker 4: all the time and one who doesn't have to act

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Speaker 4: in your bestenters all the time one hundred percent of

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Speaker 4: the time, you would choosebody who has to acting your

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Speaker 4: best interest all the time. Well, the good news is

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Speaker 4: that's eight to ten percent of advisors. It's still thirty

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Speaker 4: something thousand advisors. So mean, if you can find somebody

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Speaker 4: who has to acting your best interests all the time,

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Speaker 4: and doesn't own their own products. I think that's a

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Speaker 4: good combination of making sure they're on the same side

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Speaker 4: of the table with you.

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Speaker 2: So to sum up, to succeed in investing, simple beats,

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Speaker 2: complicated long term, beat short term. If you want to

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Speaker 2: avoid errors, steer clear of stock picking, market timing, and

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Speaker 2: if you're working with a professional, work with a fiduciary.

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Speaker 2: I'm Barry Rudolts and this is Bloomberg's At the Money