I'll respond inline with italics, as the whole quote/dequote gets problematic.
With all due respect, you would have to know a couple of things more before you can say individuals fail as investors.
Not really. For occasional people, perhaps. As a mass - this is how they are failing- You don't know what this individual is trying to accomplish in life financially
- You don't know what risk appetite and emotional maturity this individual has
- You don't know what benchmark this individual would want to meet
- You don't know how much faith this individual has in the system/world we live in
These either don't matter, or are the contributors to failure. Granted, answers for many of those can be assumed, and then your statement would hold merit, but I can think of examples for each of 1 through 4 in your list where a different outlook turns FAILURE into SUCCESS compared to his other options, considering his point of view. You can argue their original point of view, but don't extrapolate your point of view onto theirs, and elevate your criteria of success to generic, global, all-truth criteria of success.
Let me peel it down:
#1: They never invest at all. Whether it's caused by a consumption lifestyle or analysis paralysis - the average person never invests. Frequently they are ignoring a FREE doubling of their money through 401(k) matching.These are two separate points. Some people cannot stand to lose money at anything. They are the type of people who should probably stay away from the stock market, as they will scream at the moment a -10% dive happens and take money off the table. As such, they're the biggest suckers when it comes to investing.
Absolutely, there are people who cannot stand to lose money at anything (but often can waste money on buying crap) Doesn't matter. If they cannot stand to lose money at anything, they have failed at investing. Ether by never investing, or by panicking when an investment goes down. You're actually supporting my position of Mistake #1 by further explaining why people make the mistake.The 401(k) matching is more questionable, and I doubt this is an issue in the US of A, but I do hear these worries over here in Europe, where faith in the entire pension system is degrading. Basically, if you save enough money yourself, people are starting to count on that the Social Security benefits you'll get will be cut and reduced compared to people who haven't saved in a pension system. If this is a conviction you have, then consuming now could be a better choice than consuming in the future.
So, they are failing at investing because they are scared of an un-knowable future. Doesn't matter. They have failed at investing.
In the USA, many companies "match" contributions to these accounts, up to a certain amount. You put in $100, and the company puts in another $100 which becomes yours (subject to certain rules.) Invest, and you double your money. For free. Other companies might only give you $50 when you put in $100, or other variants. However, the point is made.#2: They go down the rabbit hole of complexity, ending up trying to outguess the markets - whether through "overweighting undervalued sectors" or full-blown option gambling. Once burned, they cash out at the bottom of the market, or throw up their hands and move on to mistake #3.This relates to the point of what is the financial plan of the individual. Maybe he wants to generate generational wealth and is willing to take massive risk to get there, as opposed to just financial independence that is strived for on this forum. Maybe the downside of him tanking and losing his shirt is very low, as he can count on governmental money to keep him supported.
Generate generational wealth by taking on massive risk? Yeah, that's gambling, not investing. As a bonus, it usually means that they lose bigtime - either by guessing wrong (hey, I can make HUGE money in options!) or by being scammed. The 'financial plan' as you present it is irrelevant to whether they succeed as an investor. Again, this is more proof of how people make the mistake, not a refutation.#3: They invest with high-cost "advisors" who siphon off a huge amount of the potential growth.Depends on the maturity of the individual to keep the faith in his DIY plan for investing. My guess is many of them will second guess the decisions they make, will start shifting things around as soon as a market tanks, and maybe they will also do this with their high-cost advisors. On the other hand, the fallacy of "they're paid well, so they must know better and beat the market" may give these individual investors the peace of mind that they need to keep money in the market. And yes, this probably means their returns are lower than the market returns, and this may just be fine for the individual investors choosing this route.
These are excuses for failure, with a germ of truth. If a high cost "professional adviser" is the only thing that can get someone to avoid Mistake #1 and Mistake #2, they are better off making Mistake #3. However, they will be even better off by developing a moderate amount of self reliance and self control and avoiding Mistake #3 as well.
Thinking that a professional advisor will 'beat the market' is a major problem as professional advisors typically fail to beat the market (especially once you count the costs) - what then? The market tanks, the professional management doesn't 'save' the investment and the investor sells at the bottom anyway. Or they stick through it, but end up with significantly poorer returns than if they made the same investments in a low-cost manner.#4: They don't optimize for taxes. They ignore how various IRAs and HSAs can help their total return.Unsure exactly how these rules are in the US, and this is the point I agree with most. If you'd expect a large increase in income taxes then not using IRAs could be a wise choice.
I could understand your comment for a blogpost, but not for a forumpost. One size does not fit all, and you are not the person to say if someone else fails or succeeds at a benchmark that you have in your mind and did not make explicit. According to you, when does an investor succeed and when does he fail?
Excellent point about what constitutes success. It can be hard to define - as you may then have to define the terms used in the definition. Here's my stab at it:A successful investor is one who has invested a meaningful fraction of the money available to them, and achieves long-term, real* returns What I do agree with you is that the average individual fails to make a (thorough) personalized rational and emotional analysis of the decisions they make and the context in which they make them. That goes for most decisions (buying vs renting, insurance, cars, lattes at work, eating out, kids, marriage, you name it).
Thanks for the conversation!*"Real" means they beat inflation. Yep, I am setting a low bar - you can achieve it while still making Mistake #3 and Mistake #4.