Peter Mallouk, JD, MBA, CFP, is a financial advisor who wrote an excellent book called The 5 Mistakes Every Investor Makes and How To Avoid Them. It’s not quite a high level book like Retire Secure! that I reviewed recently on the blog. It is a lower level book appropriate as a first investing book. But if that’s what you need, it ranks right up there with anything by Ferri, Bernstein, or Swedroe. In his introduction, he says this:
Many investors don’t enjoy investing, don’t have the time for it, or don’t feel they are particularly good at it. It is this type of investor who searches for an advisor to alleviate the burden—to show them the way . Unfortunately, many if not most advisors make the same mistakes individuals often make. This is the tragedy of the financial services industry….In most cases, if an investor has greatly underperformed from an investment perspective, it is not because of the markets, but because of their own, or their advisor’s own, mistakes. All of us, at times, are susceptible to at least one of these mistakes. Many of the greatest investors of all time acknowledge they have made them, or are aware of them and actively put up mental roadblocks to prevent themselves from making them.
At this point, he's got you chomping at the bit waiting to find out what the five mistakes are, no? Well, spoiler alert, I'm goi
ng to list them:
- Market Timing
- Active Trading
- Misunderstanding Performance and Financial Information
- Letting Yourself Get In The Way
- Working With the Wrong Advisor
The first two need little explanation. The fourth is a nice chapter on the primary pitfalls of behavioral finance. The fifth chapter discusses “The Three Cs” of financial advisors- custody (hint- your adviser shouldn’t have it), conflicts of interest, and competence. I wish he had included a fourth–cost-effective. I suppose that might be a little too much to ask from a book written by an advisor. In fact, he doesn’t discuss advisory fees at all!
However, I thought his third “mistake” chapter was really good. He includes a list of eight “misunderstandings” that we would all do well to know.
- Judging performance in a vacuum
- Believing the financial media exists to help you make smart decisions
- Believing the market cares about today
- Believing an all-time high means the market is due for a pullback
- Believing correlation equals causation
- Believing financial news is actionable
- Believing Republicans are better for the market than Democrats (the market rises more after the inauguration of a Democrat, but remember misunderstanding # 5)
- Overestimating the impact of a manager
- Believing market drops are the time to get defensive
Chapter 6 of the book is about how to get it right. Like me, he seems to really like lists. He gives a list of ten rules to get it right.
- Have a clearly defined plan
- Avoid asset classes that diminish results (cash and gold)
- Use stocks and bonds as the core building blocks of your intelligently constructed portfolio (he’s okay with real estate and energy)
- Take a global approach
- Use primarily index-based positions
- Don’t blow out your existing holdings (don’t generate huge capital gains taxes to get a slightly better portfolio, and don’t necessarily dump life insurance based investing products like annuities you already own, even if you regret buying them in the first place)
- Asset location matters (While true, he got it wrong as he only looked at tax-efficiency of the asset class, rather than both tax-efficiency and expected return.)
- Be sure you can live with your allocation
- Rebalance
- Revisit the plan
The 5 Mistakes Every Investor Makes and How To Avoid Them Book Overview
The best part of the book, and so good I’m going to reproduce it here in its entirety, comes just before the conclusion. This is a message that most doctors don’t need and won’t need. But many readers of this site will. In fact, I had my parents (who have been retired for several years already and haven’t touched their IRA) both read it. Mallouk calls it The Ultimate Mistake, and it is some of the best writing I have seen anywhere in a personal finance or investing book.
In 1970, a prominent politician offered my dad, his physician, some free advice. “Alex,” he said, “I have all the money in the world, but I never enjoyed it. Make time to enjoy yourself.” My dad took the advice to heart and expanded his vacation schedule.
I have observed the wisdom in this advice throughout my career. While I lead an investment committee, I am also a Certified Financial Planner and an estate planning attorney. My firm regularly works with clients throughout their lives, through incapacity, and with their families on death. Many of these very successful people have done a great job of saving a good amount of wealth and of somehow never messing things up along the way. These are two very difficult things to achieve. I have seen that these people certainly don’t deprive themselves, but they are not really enjoying their position to their fullest. Many of these folks got where they are by being thrifty and diligent. It is not uncommon for a client to save in their IRA every year for their entire life. Then, when they turn 70 ½ and the government forces a withdrawal, they ask me how to avoid taking the money out. They have been putting money in for so long, they can’t bear the thought of spending it!
Let me tell you something about your money.
Know that it makes no difference whether your heirs inherit $250,000 instead of $300,000, $600,000 instead of $800,000, $1.2 Million instead of $1.4 Million, or $10 Million instead of $11 Million, so enjoy yourself and the wealth you have spent your life creating and preserving.
After preparing a net worth statement with a client, he said to me, “I would like to die and come back as my kids.” Your estate on death isn’t just your investment account. It is also the value of your home, insurance, cars, and so on. All will likely be liquidated, thrown into a pot, and split up.
If you are financially independent, let me contradict just about everything you hear from financial advisors when I tell you to get that extra-tall cup of expensive coffee, quit driving that 10 year old car, and upgrade your next vacation.
Seriously, get a new car! You know, one with current technology and safety features! If it’s 10 years old, you aren’t even protecting yourself. This is your life we’re talking about here. You don’t use a 10-year old computer do you? Oh my goodness! If you do, get a new computer too! Geez!
Believe me when I tell you that your kids will [get the coffee, car, and vacation.] I have seen kids buy new cars and homes within days of receiving an inheritance.
If you are charitably inclined and financially independent, go ahead and experience the pleasure of giving now. Enjoy it! Why wait until you are dead? If you insist on passing your wealth to your kids at your own expense, go ahead and do it now. Enjoy passing the wealth onto your kids and grandkids rather than them receiving larger checks when you are no longer around.
The bottom line is this: It’s your money. You busted your butt for it, you saved it, and you preserved it. So long as you are not jeopardizing your financial security, enjoy yourself a bit, give away what you want to, and overall, loosen up a bit and experience the fruits of your labor.
Amen Peter, Amen. I see this a lot, and not just in my parents. I saw this post on Sermo the other day:
How do you deal with a spouse who thinks there will never be enough to retire ? The nest egg is now equal to the entire previous 30 years of income and I am 60, but he still thinks I should keep working. ( I have done well with investments and living well below our means.) There is some paranoia regarding confiscation of assets by government to satisfy Trillions in government liabilities.
I have shown him every version of the Monte Carlo calculations and the only way we can run out of money is if we both live for twenty years in a nursing home that costs more than $200,000/year and assume our investments ( in target retirement funds) do not increase at all. AND, I assume we collect no social security in the calculations because he thinks S.S. will be means tested at some point and we will lose benefits or high taxes will neutralize the benefit entirely.
I suspect this sort of attitude is quite prevalent among the financially independent, but you rarely hear about it from personal finance bloggers or authors!
If you’d like to read more of Mr. Mallouk’s writing, buy The 5 Mistakes Every Investor Makes and How To Avoid Them on Amazon today!
What do you think? Have you read the book? What did you think? What mistakes do you see investors making? What mistakes have you made? What are you doing to make sure you aren’t depriving yourself just to die with gazillions in the bank? Comment below!
Nice review. I particularly like the biggest mistake. My wife and I have all our ducks in a row at a relatively young age ie. debt free including mortgage, retirement well funded, etc. Thanks to WC, I’ve learned from my prior mistakes and have rebounded to a much better position.
I have to admit, having grown up middle class, that at times I angst about the nice car and the nice trips. The author makes a good point IF you are meeting your personal financial goals, that perhaps one should live it up a little. What’s the point in being the richest person in the graveyard? Also, I am getting more and more convinced that worst thing I can do for my children is leave them a huge inheritance. Neither my wife nor I expect anything and we are doing just fine. Having to navigate the world on your own helps develop independence and grit. Having everything handed to you breeds, in general, the opposite.
I recently read the book on a recommendation from another investing forum (it was in someone’s handful,of favorite investing books), and I thought it was basic, but also with some depth and character. The chapters started with pithy quotes or humorous anecdotes, and I thought that these made the book more enjoyable. The author has a sharp wit, and this is ingrained in the fabric of the narrative.
I do specifically remember the passage that you quoted about enjoying some of the money, even money earmarked for heirs or charitable causes, and that also resonated with me. It all comes down to uncertainty with the future–we all know that we die at the end of our story. We just do not know how or when and fear that we could be destitute or largely deplete the assets that we have worked to amass. Often the fear is mildly irrational, and sometimes it is grossly pathological,
Overall, a good book, a light read, nothing earth shattering within, but reinforces what others have written and said here and elsewhere.
IT IS REALLY VERY VERY SIMPLE to invest in stocks and bonds on your own.
No special degrees needed to do this as well as any so called professional advisor
As Andrew Tobias says ” TRUST NO ONE”
The #1 mistake is not saving from Day 1 and not understanding the rule of 72. Nothing else is more important. Time MATTERS as well as costs
NEVER PURCHASE A FINANCIAL PRODUCT YOU ARE NOT FULLY EDUCATED ABOUT
AVOID ANNUITIES and WHOLE LIFE INSURANCE(99% do not need them)
If it sounds too good to be true, it is!
Great review. Just tweeted it for my followers. Buying book as gift via your website. My tiny contribution back for your hard work.
Sounds like a worthwhile read. The post you quote on Sermo struck a cord with me. Reminds me of my mother. That is one of my peeves with the Boglehead forum. There is an excessive push towards self deprivation with the end goal of rubbing hands over a huge ball of money at the age of 90. My wife and I work hard and we save but we also travel frequently, eat good food, and generally enjoy ourselves. You only get one go shot at life. For me it’s worth enjoying the entire way, not just ages 70-90.
Fully agree with spending some of it.
Preferably on experiences with family and friends.
On a political note, “means testing” means what? testing of assets? testing of retirement income? What’s the denominator?
I’ll applaud Gov. Christie who is the sole presidential candidate, thus far, to boldly address SS entitlement, in a policy format.
However, “means testing” wrongly incentivizes against earning and saving.
Parsimonious habits are tough to change.
When the rules are passed, behavior changes. If it’s tested against assets, we’ll figure out which assets to count and which don’t. If it’s against taxable income, we’ll find ways to lower taxable income. etc etc.
“Enjoy passing the wealth onto your kids and grandkids rather than them receiving larger checks when you are no longer around.”
I subscribe to this idea. About 10 years ago we took out a mortgage and started giving the proceeds to our kids in the form of monthly checks. They are very grateful. It made more sense to give our kids money they need now rather than have them fight over the equity in our home after we die.
Best wishes.
Taylor
Very interesting idea with the mortgage. Could you explain why you chose to take on debt to give to your kids instead of giving to them without debt? Thanks.
Perhaps gifts mean more to Taylor when he pays interest on them as well?
I think Taylor is saying if they die the house equity would be distributed but it could be slow, contested and too late. A reverse mortgage now takes the equity out as payments that can be given now. As long as the reverse mortgage isn’t larger than the equity there will still be a small asset later. The kids aren’t getting debt, just payments of the equity now. It isn’t something I would do (because of the dangers of debt) but it isn’t unreasonable.
I think it’s just a mortgage, not a reverse mortgage. Big difference.
I guess you are right about what he did. Wouldn’t a reverse mortgage make more sense in that situation though? He wants to transfer home equity to others with periodic payments. Why would he want to also make a mortgage payment when he wouldn’t need to?
I don’t think he said anything about periodic payments, did he? I think he just took out a big lump sum with a refinance, he pays a monthly mortgage, and the kids got their inheritance early.
Why not just take some retirement accounts, or some other fund, and give them money from that one? Seems silly to pay the bank interest so you can give kids money. I won’t take out a mortgage to give my kids money right now, I don’t see myself doing when I’m retired. However, I will give or buy them something and take the money from savings.
If you had told me when I woke up this morning that I would actually be asking Taylor Larimore a question, I would have had such a laugh! Thank you WCI! And thank you Taylor for posting!!
At the risk of pushing my luck if/when he comes back to this thread, the question I asked is NOT the one question I would have asked. The question below came from a recent conversation I had with my daughter and some of her friends who are graduating from college and about to enter the world. It fits with WCI’s post today…
Taylor, if you don’t mind, what does money represent to you and how has that representation informed and influenced your investing decisions over the years?
Dr. Mom- Great questions. I know it wasn’t directed to me, but I’m going to have to think about this personally also. I’m excited to see Taylor’s response as I love his idea, just don’t understand the methodology.
I don’t know if Taylor will be back to this thread or not, but he is always very accessible via the Bogleheads forum.
Great review, and this was one of my favorite finance books I’ve read recently. I usually get on a kick about spring break time (maybe it’s the tax season) and read 3 or 4, this happened to be one of them.
I also loved the part about spending now. I think about my parents and how they always told me about getting 5,000 from their grandparents when they were in their 40’s. Although it was nice, it didn’t move the needle much for them. But, if they received that amount 15 years before, it would have been a huge windfall for them. Funny that I see them falling into that same trap though. Fear and uncertainty make it hard for anyone to spend, just like those examples above.
I guess time will tell how I do it, plan is to help the kids more when they are in 20’s and 30’s and then leave money for grandkids and maybe even great-grandkids.
Appreciate the point of emphasis WCI regarding not making “The Ultimate Mistake” as it definitely puts things in perspective… seeing the forest from the trees is always hard when you get so focused on the minutiae of asset allocation, asset location, tax diversification, insurance….etc.
I agree with you @Ricky that providing money for kids when they are starting out their careers (in their 20s and 30s) will go a long way and only time will tell. What I anticipate having to grapple with is helping out but not impacting their drive or motivation for moving forward in life. I have seen this happen a lot with friends and their siblings when one sibling is given more, there seems to be a correlation with less effort/drive/independence. I suppose correlation is not causation but still makes me take pause.
The question then becomes, will I help out adult children with no strings attached or only with certain preconditions? I think the former is better as it is equally important to have the opportunity to make mistakes and hopefully learn from them, but I can see it being hard for me to sit on my hands if I help my kids and they don’t spend it the way I think would be best. Ah, the joys of parenting.
Giving my two younger kids money because why not
I am not going to spend it so I put it into their investment accounts
Opened roths for all three as teenagers, worth 6 figures now and growing
Thanks for reviewing this book. As an adviser, a widespread problem for most investors, even those that are experienced, is mistake #3. And it is a huge problem. Most consumers have severe difficulty in evaluating investment performance and investment products and that is what makes them so susceptible to the sales tactics of the financial services industry. Something as relatively simple as average return numbers can be used in very misleading ways.
I also come across the issue of retirees that do not want to spend money as well. I encourage them to enjoy their life, but on the other hand, many are very comfortable with a (relatively) lifestyle of a regular routine and the opportunity to see Family and friends.
“Believing Republicans are better for the market than Democrats (the market rises more after the inauguration of a Democrat, but remember misunderstanding # 5)”
WHAT A BUNCH OF COMMIE PROPAGANDA! 😉
Sure it does. It’s because it already tanked when the election happened.
Statistically the market performs best during periods in which there is a Republican president and a Democrat congress, and vice versa (i.e., when the government is paralyzed from doing anything substantial).
The market abhores uncertainty. A paralyzed government is a predictable government.
Actually I went and talked w Peter Mallouk to figure out if I should give him my money to invest. He is a nice guy. This is his fee structure:
1.20% on the first $500,000
1.00% on assets of $500,001 – $2,000,000
0.85% on assets of $2,000,001 – $5,000,000
0.80% on assets of $5,000,001 – $10,000,000
0.70% on assets of $10,000,001 – $25,000,000
0.40% on assets of $25,000,001 – $50,000,000
0.30% on assets of $50,000,001 – $75,000,000
0.25% on assets of $75,000,001 – $100,000,000
I would have gone with him had I not found WCI. Thank you for saving me money WCI.
Over all strategy is heavy tax loss harvesting(every transaction cost money, not free unlike in some robo companies), investing in index, energy (that was before Oil drop) and some MLPs (OIL pipeline).
I seriously did like him and was very close to selecting him.
Mind you, if you have 2 million, you still pay 1.2% on the first 500K, and 1% on next 1.5 Million.
I don’t think he’s a bad advisor, and those are pretty average prices, but when you can get asset management for 0.37-0.75, seems silly to pay 0.8-1.2 doesn’t it?
WCI thanks once again, you gave me the confidence that I needed to go on my own and not worry I am screwing it up.
Nice article. Just wanted to add in, as someone who was on the receiving end of some very generous financial gifts early on in our adult lives, my husband and I will be forever grateful. It allowed us to buy a (small) house, avoid CC debt while going through school and take out less in (medical school) student loans. It gave my husband seed money for the business he started. We are certainly not the spendypants type, and have significant savings as well as a sound financial plan going forward (thanks to WCI!!) and while we certainly would have made it just fine without the gifts, they made a significant change in our life, both at that time, and going forward. I hope and plan to someday do the same for our children, should the situation seem appropriate.
Sorry, this question has nothing to do with this post… Anyway, I heard a quote from reply on a a post some time ago on WCI (I can find the thread for the life of me).. it went something like “… investment so bad I could only get doctors to buy in” Does anyone have this quote and or additional quotes about how doctors and bad investors? I need it for a lecture. Thx!
I think you’re looking for this one:
As Forbes magazine with rare accuracy suggested a dozen years ago, tax shelter economics were so bad that nineteen out of twenty investments could only be sold to groups of doctors. The twentieth scheme was awful beyond belief and could be sold only to dentists. – Martin Ginsburg
One must not forgot the psychic reward for helping our kids, even if they are adults. I can certainly afford a new fancy car but get more pleasure out of helping my kids while I am alive, and thinking of some of the benefits they may get even after my wife and I are not. Studies show buying things do not really increase happiness, although one does not have to live like a scrooge. Maybe this has something to do with evolution’s idea of us trying to benefit our genes in the future.
That’s the one. Thanks!!! I practically reread every post on WCI and couldn’t find it.
One additional point needs to be considered. I have tried to live below my means (I don’t know if it qualifies as WELL below, though) and, nearing 60, I probably have enough to walk away if I wanted to. As a pathologist I tend to see all the bad things that happen to people (you NEVER want to have something so bad that it impresses the pathologist!), and over the 30 years I have been practicing I have noticed that my age has tended to get closer and closer to that of the people that bad things happen to. It is sad to work hard and accumulate wealth only to have medical issues or other bad life events occur which prevent you from attaining the goals that you aspired to. I recently bought my first relatively extravagant new car (which I combined with a trip to Germany to pick it up at the factory). After a lot of years of letting vacation time expire unused, I am now taking every last day each year in order to see the world while still being in good health. I’m spending more money taking my wife and occasionally the off-the-payroll kids to nice restaurants, and I have ceased to feel guilty about the money I spend on my fairly recently acquired airplane-flying habit.
Although one has to be prepared for adversities and to live through a long retirement, it also seems like it would be a tremendous waste to deny yourself any current rewards to accumulate wealth that you may end up not being able to put to use. I’ve seen too many people who wanted to spend their golden years traveling but then got too sick or infirm to be able to do it.
In addition, the older you get the less time there is for your money to compound. Instead of $1 now or $16 at age 65, it’s $1 now or $1.20 at 65. Much easier to spend.
Thanks for the review! That one goes on the future reading list, and I asked the library to get it — I love good books that say things simply. The commentary on buying a car hit home, since my s.o.’s car is approaching the 10-year mark and we’re slowly analyzing future purchase timing etc. I’m still not getting the extra-tall cup of expensive coffee (most of the time), but we’ve liberalized our pocket money somewhat since completely paying down loans.