176 – 10 Ways to Sabotage Your Investment Portfolio

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10 Ways to Sabotage Your Investment Portfolio

Steer clear of these common errors to help safeguard your investment portfolio.

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Avoid these common mistakes when it comes to your investments! Bob and Shawn discuss the 10 ways they often see clients sabotaging their investment portfolios. They emphasize the importance of discipline, wisdom, and seeking counsel in making investment decisions.

Whether it is a client making large frequent withdrawals or even treating their investment portfolio like a savings account, there are many ways to sabotage your investment portfolio without knowingly doing so. They stress the long-term consequences of these behaviors and the need to be good stewards of one’s finances.

Mentioned In This Episode

Shawn:
Are you unknowingly sabotaging your investments? From ignoring wisdom to making emotional choices? We’ll explore 10 pitfalls to avoid, backed by Scripture. Let’s get some perspective.
Welcome to another episode of Christian Financial Perspectives. My name is Shawn Peters and I’m joined as always by my esteemed co-host and father-in-law, Bob Barber. Whether you’re watching this online or you’re listening on one of the many podcast directories, we’re so glad that you’ve joined us. Today, we are going to be covering 10 ways people sabotage their investment portfolios. Now, if you do enjoy content like this where we cover financial topics from a Christian perspective with the goal of helping Christians glorify God in their finances, we’d love for you to hit that subscribe button. But today, this is a kind of difficult topic, and we want to be sensitive to that. We understand that the journey of investing is fraught with challenges and emotions because we are emotional creatures made in God’s image. So can’t really help that, right Bob?

Bob:
No, we can’t.

Shawn:
But today, our mission, our goal if you will, is to offer you some compassionate guidance on some typical missteps that we see people make with their investment portfolios. Keep in mind, no judgment here, just wisdom steeped in years of experience, faith, and scripture. I will say the years of experience are more heavily leaned towards the side here on Bob’s side.

Bob:
It’s the gray hair.

Shawn:
But I’ve almost gotten to 10 years. So I can almost say I have a decade of experience.

Bob:
Yes.

Shawn:
A little bit closer. But I’d like to share a scripture before we go any further. Since this is Christian Financial Perspectives, I think that’s appropriate. Hebrews 12:11, “For the moment, all discipline seems painful rather than pleasant, but later it yields the peaceful fruit of righteousness to those who have been trained by it.” Now, I think that’s a wonderful scripture when we’re talking about in investing because it is for the long term and that in the moment that discipline can seem difficult or painful or in the way of what you’re trying to do. But the reality is you need that to be successful. So hopefully if we cover some of these today and if even one of these jumps out at you, we’ll have done our job.

Bob:
And Shawn, as you know, as always, I’m coming to people. I’m coming to them from the perspective of many years. We talk about decades. I got three decades of investment experience. And it’s heartbreaking when someone calls us for the 50th time and takes a withdrawal and you’re done, your portfolio’s depleted, you’ve depleted it. And they’re like, well, I had $500,000 just two or three years ago, or I had $1,000,000 5 years ago. And we give numerous, numerous warnings and it’s hard. It’s hard. And that’s why we want to come at this with compassion.

Shawn:
That’s right. And of course we’ll get into what Bob’s referring to on the withdrawals.

Bob:
Exactly. So we’re going to cover this from the least important to the most important. So the most important is going to be at the end of the program, but I’ve seen overall, there’s 10 areas I’ve seen that people will sabotage their portfolio from lack of. So starting at number 10.

Shawn:
Sure, number 10, lacking a written investment strategy and sticking to it.

Bob:
Now, I’ve never met anybody that had a written investment strategy. We have one here, but just sticking to it, that word sticking to it is the most important thing. And again, a lot of this program is going to focus around discipline because that’s what this is about is discipline. The reason investment portfolios are sabotaged over time is because of a lack of discipline.

Shawn:
That’s right. Which manifests in numerous ways. So number 9, lack of diversification. So investing in only one or two sectors.

Bob:
And I’ve said this many times on the program where I see the main sector that people get so caught up in, they believe a hundred percent of their investments ought to go there is in real estate. Shawn, right here in New Braunfels, we have a major development that we started about six or seven years ago. When I say major, it’s going to be 5,000 homes by the time it’s done; they’re probably at about 1500 homes. Now, I’m not going to mention the name of development.

Shawn:
Because they didn’t pay us for a sponsorship.

Bob:
Well, it’s not just that because they might not.

Shawn:
I know, I’m kidding.

Bob:
But Shawn, I went on realtor.com the other day, and remember we gave the warnings about real estate. There are some homes in there that are coming up on one year being on the market that are finished homes. They’re not resales and they haven’t sold. And we’re heading up to a year.

Shawn:
I remember it wasn’t that long ago, Bob, where your average duration of inventory was like one month. So homes, if you had it on the market for 30 days, it was kind of weird.

Bob:
So those that just invested in real estate probably pretty much hurting right now as we see interest rates are at 7.5-8% when they were 3% just a year ago.

Shawn:
As a side note, we are not dogging on anybody investing in real estate.

Bob:
Not at all.

Shawn:
That’s just a very common example of when someone is investing in one primary area. Definitely the most common.

Bob:
You know me, I’m a big real estate investor.

Shawn:
Oh yeah, yeah. We’ll have to cover that on another day.

Bob:
Yeah, we can. Alright.

Shawn:
But number 8, trying to time the markets

Bob:
Just doesn’t work.

Shawn:
It doesn’t.

Bob:
The markets will move so quickly that you cannot time them, and thinking that you can and be successful at it, you’re going to be on the wrong side of the trade.

Shawn:
Bob, I do have a question for you to cover for our viewers and listeners. Trying to time the markets doesn’t work. Now, how is that different with how we manage as a fiduciary discretionary advisor? How is that different? Because I’m sure that someone watching right now or listening is going to say, well, isn’t that something you guys do in your management?

Bob:
Not necessarily. No, we really don’t because we’re looking at long-term trends and we were looking at long-term trades. We never make a trade to go to over-wait a position or under-wait a position. We never do that based on just a date.

Shawn:
Or to try to time the exact top or the exact bottom. No, I think a good example, which I’m not going to give specific numbers, but there was recently when we were towards the end of 2021, you had talked to us with the investment management team and the idea was the wind’s out of the sails. So even though the boat’s moving forward, there’s not a whole lot supporting continued growth at the rate that we were at.

Bob:
There wasn’t a lot of steam left.

Shawn:
Yeah. And this is third quarter 2021. So no one would look at that and say, oh you timed the market perfectly. Because, I mea,n we were pulling back from some of our positions three months before we actually had a huge pullback.

Bob:
But I didn’t go completely out.

Shawn:
Exactly. Yeah. We made a slight adjustment again, which I think is a big distinction is many times the timing in the market comes into people try to take everything out and then move everything back in. But in professional management it’s a, “Oh well let’s pull some back because that way we’re still invested. However, we also have a little bit of an opportunity to hopefully buy some at a discount.” Again, not necessarily the absolute bottom.

Bob:
It’s over-waiting or under-waiting.

Shawn:
Exactly. Okay. Anyway.

Bob:
So number 7, I want you to read this and I’m going to comment, I got some good comments on this one.

Shawn:
Okay. Number seven, not understanding the Rule of 72 and how compounding works and applies.

Bob:
Shawn, this will sabotage your investment portfolio worse than anything there is if you don’t understand how the Rule of 72 works.

Shawn:
Now, Bob, for our viewers and listeners…

Bob:
I’m gonna explain

Shawn:
…because there may many that don’t know what it is. What is the Rule of 72?

Bob:
Alright, so the Rule of 72 is based on, it’s a mathematical formula where you take the rate of return that you’re making. Okay, so let’s say 6%. The reason I’m using 6% is because 6 goes into 72 perfectly. It goes into it 12 times based on the Rule of 72’s, that means that a portfolio will double if you don’t take anything out of it and is averaging 6% year in year out, that portfolio will double in 12 years.

Shawn:
So not adding or removing any money, assuming it’s consistent at 6% a year.

Bob:
And it would double in another 12 years. So you think about that’s $50,000 going to a $100,000, $100,000 going to $200,000…times four. So we’re going to talk about the times four effect. Okay?

Shawn:
Yeah. Got it. Okay. So number 6, panicking: not understanding the risk-reward relationship and how volatility is a normal part of investing, which I think is important. Bob just made the mention of a portfolio returning 6% a year for the Rule of 72. Now what that does not mean is that you made exactly 6% every year. But it’s that over the course of that 12 year time period, for that example, you are assuming an average of 6%. And the reality shows this is that one year it might be 10%, another year it might be 2% or 3%, might be down.

Bob:
That’s right.

Shawn:
But over that period of time, that would end up being the average. And so that panicking part, that understanding the volatility, whether you’re in a portfolio that is very conservative with just fixed income and cash-like equivalents or you’re very aggressive in 100% growth equity, growth stocks, there is volatility associated with every single one of those. Now the volatility of how much you’re down in a six month window you might be, is going to be very different from one end to the other of that spectrum. But it’s very important that you understand the objective, “Hey, what’s normal?”

Bob:
Because people will see how much their portfolio was down and I had a client in here yesterday and the portfolio was right at $2 million. Well, okay, so if you’re down 4% on $2 million, what’s the number, Shawn, how much would you be down? 4% on 2 million.

Shawn:
Don’t make me do the math right now.

Bob:
$80,000, okay, you’d be down $80,000, but if you’re down 4% on a $100,000, you’re down $4,000. So, it’s hard. It was harder for this person. They’re like, wow, I never thought of it that way. Because the more you have, even though it’s the same percentage, it’s going to be a lot more dollars.

Shawn:
The dollar amount is bigger, the percentages are still the same.

Bob:
That volatility is a normal part of investing and this will sabotage your portfolio. Again, if you do not understand that volatility, risk, and reward are all associated with investment portfolios.

Shawn:
Yeah, that’s right. So number 5, allowing emotions over logic to dictate your investment decisions.

Bob:
I’ve said this over and over, emotions and finance mix together like oil and water, it should not ever, ever be involved in investment decisions.

Shawn:
And one way to think of that, Bob, is your emotions are part of you. I mean we’re made in God’s image.

Bob:
They are. And it’s hard to put that aside.

Shawn:
So what I would say using your favorite saying, it’s just math, is you use the math and logic and the statistics and knowing what is normal versus abnormal to basically help you keep control of your emotions. And if you’re feeling that emotion of “Oh, we need to sell, we need to buy!” Maybe take a second, look at the facts, look at the numbers, seek wise counsel. So your emotions don’t rule you.

Bob:
Look at logic.

Shawn:
So number 4, chasing returns. I think the example you have here is changing car lanes type mentality of you’re in stop and go traffic and all of a sudden a little spot opens. So you move over to the left and you’re like, oh, oh, now spot open. You move back into the lane you were in.

Bob:
Exactly.

Shawn:
And at the end of the day, what have you done? You’re no further ahead really.

Bob:
You’ve gotten no…right.

Shawn:
You just expended a lot of extra energy and stress and frustration jumping back and forth. It’s no different with chasing returns.

Bob:
I’ve seen this, there’s a tendency in us as humans, sometimes we want change every five to seven years and we get caught up in chasing returns. So we think, well if I’ll go over to that new advisor, I’ll get a better return. And it usually happens in a bear market, so there’s nowhere else to go but up. So you feel really good about your new advisor because there was nowhere, I mean his portfolio, her portfolios went down the same amount, but you weren’t there when it happened. So you move from one advisor to another. We get a lot of them, they’re moving from and I’m like, okay, this is how you invested. And I always make sure, yeah, we were down, too.

Shawn:
We tell people.

Bob:
Right, I don’t want to say no, we’re just up.

Shawn:
So Bob, I believe the biggest downfall of how to sabotage someone’s portfolio is because if you’re chasing those returns, what ends up happening? Well, in a downmarket, you move to another advisor. So you’re selling out of the positions that you already had. And usually, there’s a bit of a lag time. So depending on how long the bear market and the pullback is lasting in the markets, you may be selling at one of the worst times. And then by the time the dust settles and you’re actually onboarded with the new advisor and you go through the process you’re supposed to go through and you get invested, you may have missed out on 10-20% of whatever the rally was. I mean, the percentage is, I’m not going to give a specific percentage, but the point is you could miss out on the markets have already started to recover. So not only did you sell while you were down, but now you weren’t in because you were too busy chasing returns somewhere else, right?

Bob:
Yeah. I mean in a matter of 10 days of markets can move easily, move 8-10% they can. And I’ve seen it many, many times.

Shawn:
So anyway, I just thought that’d be a good example of, well how does that actually hurt you? So number 3, using an investment portfolio, like a savings account or a checking account.

Bob:
We see this one a lot, don’t we?

Shawn:
Which does kind of tie into our number one most important thing to remember, which we’ll get into.

Bob:
It does, it does. So we’ll get into that here in just a minute, which is very, very important. But do not use an investment portfolio like a savings account, bottom line.

Shawn:
It’s not a piggy bank.

Bob:
Alright, so we’re getting down to the number one, but first we’re going to get into number 2.

Shawn:
Unwilling to take wise counsel or advice.

Bob:
We’re getting into the top two now.

Shawn:
So if you don’t remember anything else from this program, remember this one we’re about to cover and the last one. So number 2, unwilling to take wise counsel or advice. The Bible teaches us the importance of seeking wisdom and counsel, ignoring advice from experienced professionals can set you on a dangerous path. We have seen, Bob more than I have because he’s been around longer, but we’ve seen portfolios go from flourishing to empty because individuals thought they knew better than those guiding them. And this is not a prideful thing of like, oh, Bob and I are so smart, but this is what we do for a living. And as a fiduciary advisor, our goal is to try to do our best to do what’s best for our clients. So when we give advice, it’s to try to help the people we’re working with. We’re not trying to…

Bob:
We’re not doing it to hurt you.

Shawn:
…be like you don’t know what you’re doing or look how cool we are. We want to help you. And so Proverbs 1:5-7 says, “The fear of the Lord is the beginning of knowledge, but fools despise wisdom and instruction.”

Bob:
That’s scripture.

Shawn:
Exactly.

Bob:
Very clear there.

Shawn:
This scripture emphasizes the significance of wisdom and instruction in the context of investing. Disregarding sound advice could lead to catastrophic financial consequences. It is soul crushing when we have to watch people lose what they have worked so hard for, typically over many years, simply because they were closed off to sound advice and guidance. And Bob, I know you have two wise sayings you’d like to share.

Bob:
It’s the country boy in me. It’s always the country boy in me. It comes out a little bit here. And these two sayings are people can be their own worst enemy. We’ve heard that one before and one that we always used out on the farm with my grandfather. Either you could lead a horse to water for his own good, but you can’t make him drink it.

Shawn:
And if you stick his head in the water, you might drown him if he doesn’t want to drink. So you really can’t force him.

Bob:
Which takes us to number 1. Can you guess what it is? Maybe Jenna can put a drum roll in here. You know what number one reason that people sabotage their investment portfolio.

Shawn:
Large frequent withdrawals.

Bob:
Yep.

Shawn:
So number one is the heavy price of large frequent withdrawals. The Bible warns us against foolish spending habits, and yet one of the most destructive behaviors we’ve observed is making large frequent withdrawals from an investment portfolio. The immediate ramifications are concerning enough, but the long-term effects are even more devastating.

Bob:
Yes, they are.

Shawn:
We’ve seen this occur through frequent large, one single withdrawal as well as many cumulative ones over a 9 to 12 month period. So, when the total of these withdrawals are more than 6-8% of a portfolio’s value, whether it was that one time or during that 12 month period they totalled up to that.

Bob:
You withdrew more than 8% of your portfolio.

Shawn:
It can have devastating effects on the lifespan of the portfolio. And when you have a $500,000 portfolio and you take out $50,000, well it doesn’t seem like much, right? It’s only $50,000, I have $500,000. Or when you have someone with a 2 million portfolio and they’re taking out $50,000 here and a $100,000 here and oh, I’m going to do a remodel, whatever it is, it adds up so quick. It does. So to kind of reiterate what we said a little earlier, but an investment account is not a piggy bank or savings account. It is meant for long-term growth and then a long-term draw from that, typically during retirement where you’re not earning money anymore and you need to be able to have that last at least as long as you might last.

Bob:
Well, I see a lot of people in their fifties doing this.

Shawn:
Kind of getting closer to retirement, but you’re still 15 years away.

Bob:
I mean they’ve got 30 more years, 35 more years to live. And this is the things we see it for wanting to buy a new car or truck, which today is $50,000.

Shawn:
Oh, easy. Yeah.

Bob:
Easy. Especially for a truck; paying for expensive vacations. We’ve seen this many times over and over. This is an interesting, and I put this in there because I’ve seen this several times.

Shawn:
We’ve seen this unfortunately happening more often now, number three.

Bob:
You’re taking a large withdrawal for an adult child because they want something, and there’s this parent guilt complex if you don’t help ’em.

Shawn:
Because from their perspective, well, you have the money not ,realizing that the very fact that they’re asking, they’re not being a good kid, they’re not being respectful of you as a parent because they’re asking you to take money that’s supposed to help take care of you as you’re getting older.

Bob:
In your older age.

Shawn:
To pay for something that they want.

Bob:
These areas that we’re mentioning right now, the new car or truck, the expensive vacations, the adult child needing some money, next will be home remodeling. All of these should be taken from savings accounts, not investment portfolios. Because when we build an investment portfolio, we’re building it for the long term, and it’s disruptive to our portfolios. We may have just taken a new position and that new position, we plan on that for three years and we’ve only been in it three days and now we got to go and sell that position off. And another thing that people need to understand too, in investment portfolio, having a little bit of cash is a strategy, an investment portfolio. That’s not cash to spend, that’s cash for investing. And it is part of a strategy. I’ve seen this one, too. Speculative startup businesses and these businesses we know, and again, we’re coming to this out of compassion, it’s not here to hurt anybody, but 90% of businesses fail in the first couple of years, and consistently withdrawing money from that portfolio to fund that business because the business can’t fund itself, Shawn. Okay.

Shawn:
And then the last one, just general spending based on things that you want and not needs and living beyond your means. So you have a certain amount of income that you’re living on and then you decide, oh, we want a little bit more. We’re gonna buy a few more things and you start pulling more money from your investment account, and it’s not sustainable.

Bob:
And you notice I have here…

Shawn:
And this happens especially with sudden wealth.

Bob:
Especially with sudden wealth,

Shawn:
Whether that’s inherited and we’ve covered that before, we’ll put a link in the description.

Bob:
Yeah, about sudden wealth.

Shawn:
There’s a lot of reasons why you might have sudden wealth.

Bob:
So here’s the thing that most people don’t realize , large or frequent withdrawals that add up over that 12 month portfolio over that 12 month rolling period, can really destroy it. And this is because of the Rule of 72. So I want to describe this to you. Remember I said the Rule of 72, if you’re making 6%…

Shawn:
Takes 12 years to double.

Bob:
Right. Okay, so just say you’re 60, that’s 84, 24 years ahead.

Shawn:
To double twice.

Bob:
Yeah. So you take $50,000 out to buy that truck. What you have just done is you have just caused your portfolio, you’ve taken away $200,000 from your portfolio later in years.

Shawn:
Over the next 24 years.

Bob:
What is that truck? Or what is that car going to be worth in 24 years?

Shawn:
Let’s see, 0.

Bob:
10% or 20% of the value. But that’s the kind of thing that I don’t think people really understand and they don’t understand they need to apply the Rule of 72, if they take it out of a growth portfolio that’s averaging 8-10%, now you’re talking about maybe possibly three doubles. So it’s a fourfold effect. So when you take out $50,000 or you take out 20k, it’s like you’re really not taking out 20k, you’re taking out 80k, or you’re really not taking out 50k, you’re taking out $200,000. That is something that a lot of people never think about on longterm consequences.

Shawn:
Based on life expectancies, Bob, if you’re watching this and you have maybe another 20, 30 years that you’re expected to live, then that money you’re taking out, multiply that by four to give you an idea of what it’s really costing you in the long run.

Bob:
That’s correct. That’s right. And Shawn, I’ve seen how long it can take to save it and when you pull it out, usually you don’t get it back. I mean, I don’t think I’ve ever seen withdrawals put back in that were large withdrawals.

Shawn:
Especially later in life. Maybe when you’re younger, maybe in your twenties and thirties. Sure.

Bob:
But bottom line is we don’t want you to sabotage your portfolio. We don’t want to see anybody’s portfolio sabotaged. We want to help you.

Shawn:
The long-term goals – we want to make sure if you’re watching or you’re listening to this, we want to make sure that whatever that God has blessed with, that you’ve been a good steward with and you’ve been saving up, we want to make sure that is still left over whenever you go home to be with the Lord. We don’t want you to be around and the money isn’t.

Bob:
So Proverbs 21:20, it says, “The wise have wealth and luxury, but fools spend whatever they get.” Investing is truly a lifelong commitment that demands patience, discipline, and a trusted advisor.

Shawn:
To lean on. That’s right. And we’re here to offer you that support, of course rooted in Biblical principles and decades of experience, mostly on this side, on Bob’s side. Thank you so much for taking time to be with us today. I know we went a little bit longer, but I feel like this was just…

Bob:
It’s a very important subject.

Shawn:
Really important subject. And even if just one person found this and it helped, I think it was worth it. So if you want to reach out to us for comment, questions, help, whatever it might be, you can reach us via phone or text at (830) 609-6986. You can also visit our website www.christianfinancialadvisors.com. Thank you so much and God bless.

[DISCLOSURES]

* Investment advisory services offered through Christian Investment Advisors Inc dba Christian Financial Advisors, a registered investment advisor registered with the SEC. Registration as an investment advisor does not imply a certain level of skill or training. Comments from today’s show are for informational purposes only and not to be considered investment advice or recommendations to buy or sell any company that may have been mentioned or discussed. The opinions expressed are solely those of the hosts, Bob Barber and Shawn Peters, and their guests. Bob and Shawn do not provide tax advice and encourage you to seek guidance from a tax professional. While Christian Financial Advisors believes the information to be accurate and reliable, we do not claim or have responsibility for its completeness, accuracy, or reliability.