The No. 1 reason investors fail in the long run

Right now, the past looks pretty good. Investors who bought into Vanguard’s popular S&P 500 fund VFINX and kept their money there with dividends reinvested achieved annualized returns of 13.8% over the past 15 years, 11.9% over the past 10 years, and 15.5% over the past five years.

Those returns (through the end of December 2023) were easy to achieve. Yet many investors — perhaps most — didn’t do that well.

In a recent newsletter, I asked readers why they think that happened.

Here’s what investors say

Here are three of the responses I got, edited lightly for space and clarity:

Reader A: I think the answer is very simple. Human behavior. Long-term success is a marathon, and most humans don’t complete a marathon. When it gets too tough, they quit.

If we assume rational asset allocations…we know there is a very high likelihood of success in the long run, beyond mile 20.…But getting to the long run has nothing to do with intellect; it’s about having a very strong and stubborn mindset. Most investors don’t have that.

Too many don’t save enough of what they earn. Many look for the next Microsoft MSFT, +1.43% or Google GOOG, +0.68% or Amazon AMZN, +1.34%, rather than settling for slow and steady index funds.”

Reader B: I have thought through my past failures in investing and what I see around me. Here are some of the top reasons I see:

1. Ignorance about the difference between speculation and investing. I did not think about building a portfolio of low-cost index funds. I thought about finding stocks that were the next big winners. I lost a lot of money trying to pick winners. I also bought mutual funds loaded with fees because the ‘experts’ knew how to pick them.

2. Personal psychology. If you are always buying some news flash about what is hot, and selling out of fear regarding what is not, then you lose a lot of money. 

3. Unwillingness to delay gratification. I want something right now, so I buy it. I don’t ask hard questions about what I really need and don’t need. I end up living under a tyranny of gratifying my current desires at the expense of preparing for my future desires, like the desire to retire comfortably. 

4. Unwillingness to be satisfied with ‘good enough.’ I want the perfect portfolio. I have done a lot of ill-advised buying and selling in search of it’.”

Reader C: The No. 1 reason is second-guessing, and making huge portfolio changes after receiving new information, probably from an ‘expert’. 

These three readers have things figured out very well.

Here’s something else from Reader A: “Too many investors try to time the market, which no one is smart enough to do. That often causes one to buy high and sell low, a recipe for disaster.”

I agree with that point, though I might soften his first sentence by saying “which almost no one is smart enough to do over the long haul.”

The trap of common sense

Louis Navelier has been writing about investing for more than 40 years, and what he writes always makes lots of sense to me.

Perhaps ironically, Navelier believes that “common sense” is one of the most dangerous traps that snare investors. In his view, investors understand they don’t know the future, but they just can’t believe there isn’t somebody else who does. A “guru,” in other words.

And because of this bit of supposedly “common sense,” over the years, tens of millions of investors have lost trillions – that’s right, trillions – of dollars because they followed their chosen gurus.

My take on this topic

I can be long-winded and go on and on and on about important investing lessons. But really, the experts I have quoted above leave me with relatively little that’s essential to add.

Too many investors regard the financial news, especially what they see on TV, as a reliable source of insight about the market’s future.

Readers, please wake up! The financial news is not an educational service. It’s a business. A business that makes money from advertising.

Anything that keeps viewers regularly coming back for more is good for business. How do you keep them coming back? Make them anxious. Fuel their fear, their greed, their desperate hope for anything that will give them an edge.

Any experienced financial commentator can always cite a list of plausible reasons the market is likely to go up and a list of equally plausible reasons it’s likely to tumble.

If nothing else, these “analysts” can always try to explain the market by saying “Investors are concerned about what the Fed is going to do.”

I cannot think of any time in the last 50 years when that sentence wouldn’t have sounded vaguely “wise,” while being utterly useless.

If you want to be a successful investor over the long term — getting through the first 20 miles of a marathon — the strongest forces working against you are Wall Street and its sales culture, the financial media, and your own emotions, especially your impatience and fear of loss.

Here are two things that can help you overcome those hurdles.

First, come up with a good long-term plan, put it all on automatic, and then leave it alone.

Second, if you’re not sure you can do that, find a good fiduciary financial adviser and follow that person’s guidance.

When you’ve done those things, stop focusing on finances and live whatever sort of life you want to live (and can afford).

For more on this topic, check out my latest podcast, The No. 1 reason most investors fail.

Richard Buck contributed to this article.

Paul Merriman and Richard Buck are the authors of We’re Talking Millions! 12 Simple Ways to Supercharge Your Retirement.