Smarter way to build wealth

Ritholtz: Investors should not ignore experienced commentators entirely, but they should be highly selective about whose advice they follow.

FOR many investors, the biggest threat to long-term returns is not a market crash, stubborn inflation or geopolitical shocks. Instead, it is often their own behaviour.

That is the central message from Barry Ritholtz, co-founder and chief investment officer of Ritholtz Wealth Management, who argues that avoiding costly mistakes is often a more reliable path to building wealth than chasing the next winning investment.

Speaking on the recent Better Vantage podcast by published by investment company Vanguard, Ritholtz says investors spend too much time searching for ways to outperform the market when they should first focus on avoiding self-inflicted errors.

“The first step to becoming a great investor is don’t be a bad investor,” he says.

“You’ll never get alpha if you’re not at least getting beta. You’re not going to beat the market if you don’t at least start with what the market is giving you,” he highlights.

The remarks come as retail investors have more access than ever to investment information, social media commentary and trading platforms.

While technology has democratised investing, Ritholtz believes it has also amplified distractions that tempt investors into making poor decisions.

His latest book, “How Not to Invest: The Ideas, Numbers, and Behaviours that Destroy Wealth and How to Avoid Them”, deliberately avoids offering another list of stock-picking strategies or market forecasts.

Instead, he focuses on eliminating the mistakes that repeatedly derail portfolios.

“I don’t want to tell people what to do,” he says. “How about, let’s stop shooting ourselves in the foot. Let’s stop making all of these unforced errors. If you avoid all these mistakes, you’re better off than 95% of your peers.”

The idea was inspired partly by a comment from Charlie Munger, the late Berkshire Hathaway vice chairman, who famously dismissed suggestions that the firm’s success came from superior intelligence.

“We’re not smarter than everybody else. We’re just less stupid,” Ritholtz says, citing Munger.

Separate decisions from headlines

That philosophy shaped his own investment approach.

“The odds are very much against you,” Ritholtz points out. “You’re not going to be the next (legendary investors) Warren Buffett or Peter Lynch as a stock picker. You’re not going to be a market timer. You’re not going to be able to rotate sectors.”

Rather than searching for extraordinary returns, he believes investors should concentrate on avoiding predictable behavioural traps.

One of the biggest pitfalls is placing too much faith in market experts. Ritholtz stresses that investors should not ignore experienced commentators entirely, but they should be highly selective about whose advice they follow.

“My advice from the book is, you have to be really selective,” he argues. “Just because some 24-year-old French literature producer booked this guest on TV doesn’t mean that they’re speaking the biblical truth.”

Investors should also ask a simple question whenever they encounter market commentary.

“What is this person selling? And is this something I need to buy?”

Separating investment decisions from the constant flow of headlines is equally important.

Ritholtz says he deliberately maintains “a very robust wall” between his long-term financial plan and “the daily fire hose of news, noise, opinion, commentary”.

“What happens on a random Wednesday morning in 2026 really isn’t relative to the average person’s retirement in 2046,” he explains.

“The business of investing distracts us from the practice of investing,” he adds.

He also warns that investors often overestimate the value of breaking news, forgetting that financial markets usually absorb widely available information almost immediately.

“If it’s in the front page of The Wall Street Journal, or if it’s in a widely distributed blog post or social media, it’s already in the price,” he points out.

Importance of humility

Perhaps the biggest lesson he drew while writing the book was the importance of humility. Instead of trying to predict a single future outcome, he says investors should prepare for a range of possibilities.

“I don’t know what’s going to happen next, but my portfolio has to be robust enough that whatever the world throws at it,” he adds.

That means accepting that a diversified portfolio may not lead the performance tables every year, but can deliver stronger results over decades through consistency and compounding.

“If you want to be a top performer, at least start with what the market gives you and stick with it over the decades,” he highlights.

Ritholtz also worries that the next generation of investors faces a different challenge altogether – one fuelled by social media, mobile apps and gamified trading.

He believes investing is increasingly being treated like entertainment rather than long-term wealth creation.

People now follow “TikTok investors” and “Finfluencers”, creating what he described as “an endless fire hose” of speculative content.

Rather than banning speculation altogether, however, he advocates putting strict limits around it.

“Pull aside a cowboy account, 3% to 5% of your liquid net worth, go to town, scratch that itch,” he says.

Investors who enjoy stock-picking, options trading or market timing can indulge those interests without jeopardising their retirement savings.

“If it goes to zero, well, it was a tiny percentage of your portfolio. Thank goodness it wasn’t your whole retirement savings,” he says.

Meanwhile, he advises leaving the rest of the portfolio untouched.

“Leave your real money unmolested,” he says. “The long-term money is made by just allowing it to compound.”

Expensive mistakes

Among the most expensive mistakes investors make, Ritholtz highlights overconfidence, excessive exposure to market noise and recency bias – the tendency to assume recent events will continue indefinitely.

“We have no idea” what lies ahead for economies, markets or interest rates, he says.

“And yet, we often behave as if we do. That’s probably the single biggest source of error in investment,” he adds.

He also points to academic research on the Dunning-Kruger effect, which suggests inexperienced investors frequently overestimate their abilities while experts are often more realistic about what they know.

“If you understand what your skill set is, you can stay within it,” he says.

Ironically, Ritholtz admits that even professionals are not immune to costly mistakes.

He recalls buying Apple shares around the launch of the original iPod and proudly selling them after the stock tripled, only to watch the company become one of history’s biggest wealth creators.

The experience reinforced another lesson from his research: buying good companies is only half the challenge.

“Finding a great stock turns out to be, as difficult as that is, the easy part,” he points out.

“It’s how long do you hold it? When do you sell?... It’s very difficult to tell the difference often until it’s too late,” he highlights.