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 goi5Mistake bookng to list them:

  1. Market Timing
  2. Active Trading
  3. Misunderstanding Performance and Financial Information
  4. Letting Yourself Get In The Way
  5. 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.

  1. Judging performance in a vacuum
  2. Believing the financial media exists to help you make smart decisions
  3. Believing the market cares about today
  4. Believing an all-time high means the market is due for a pullback
  5. Believing correlation equals causation
  6. Believing financial news is actionable
  7. Believing Republicans are better for the market than Democrats (the market rises more after the inauguration of a Democrat, but remember misunderstanding # 5)
  8. Overestimating the impact of a manager
  9. 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.

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  1. Have a clearly defined plan
  2. Avoid asset classes that diminish results (cash and gold)
  3. Use stocks and bonds as the core building blocks of your intelligently constructed portfolio (he’s okay with real estate and energy)
  4. Take a global approach
  5. Use primarily index-based positions
  6. 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)
  7. 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.)
  8. Be sure you can live with your allocation
  9. Rebalance
  10. 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!