Irrational Behavior will Hinder your Path to Wealth – Part II

Do you ever notice how the mind plays awful tricks on us?

Never more so when it comes to financial topics, whether that is dealing with debt, saving, or investing.

I have written before on the topic of “Cognitive Distortions on the Path to Wealth – Part I”. This post is somewhat related and can be considered Part II of the series. What I will try to do here is bring together some very tangible behaviors/practices as well as cognitive behaviors that get in the way of investors. Hopefully they will provide some food for thought as you look back at your investing journey, or more importantly, how you are approaching investing today. It is these behaviors and practices that you need to be aware of if you wish to lay the solid foundation for a better tomorrow.

Lack of Diversification

Let’s take a look at the relatively recent period of 2000-2009, often coined the “lost decade” for investors. This period produced one of the worst ever runs for the S&P 500. The S&P 500 is an American stock market index based on the market capitalizations of 500 large companies having stock listed on the NYSE or NASDAQ. During this period, the S&P 500 lost on average nearly 1% a year in terms of total returns. The figure below of the SPDR® S&P 500 ETF (SPY; aka the spider fund) provides the gory details.

SPY fund_for blog

But the S&P 500 is only one group of stocks. Over the same period, other asset classes performed much better, as you can see in the following figure. Large cap value and international stocks outpaced the S&P. US Bonds, Emerging Markets and REITs simply left the S&P standing.

lost decade_for blog

But the S&P 500 is only one group of stocks. Over the same period, other asset classes performed much better, as you can see in the following figure. Large cap value and international stocks outpaced the S&P. US Bonds, Emerging Markets and REITs simply left the S&P standing.

What is fascinating is that during this period of wicked-bad (Did I really say wicked-bad!?) performance for the S&P 500, other asset classes performed admirably – exemplified by US Bonds, Emerging Markets and REITs.

What is even more mind-boggling and speaks to the importance of diversification is what happened (data not shown) in the subsequent period 2010-2015. The S&P 500 provided a nice total return of 108%, US Bonds were modest at 25%, Emerging Markets stunk at -5% and REITs continued to do amazingly well at 129%. Good luck predicting what REITs will do over the next decade. Will they revert or continue to march along at their own pace? Who knows?

This cyclical nature of poor performance-great performance for S&P 500 and vice-versa for US Bonds and Emerging Markets should be a reminder that un-correlated returns do exist over sizeable periods of time. That can be used to your advantage.

Now I do not mean to bash on established funds like SPY or VFIAX (Vanguard 500 Index Admiral) that also performed as miserably over that same period. That is simply not the intent. The intent is to bring into view how an over-emphasis on any one asset class can hurt your portfolio big time. It is worth looking very hard at each and every piece of your portfolio, be it tax-deferred or taxable accounts, and asking yourself the following questions.

Am I diversified enough in each bucket?

Am I diversified enough across my whole portfolio and is this aligned with my risk tolerance and life goals?

Here is what the diversification pie looks like for Mr. and Mrs. PIE’s portfolio. It includes all funds across tax-deferred, taxable and money market. If we are going to write about diversification, we better put our asses on the line for critique, right?

asset allocation_june 7_for blog

Alternatives include REITs, US Treasury Backed Securities, Asset Backed Securities and Mortgage Backed Securities, with REITs being the largest within this segment. Personal Capital’s Allocation tracker shows that our US Stocks are classically diversified over large, mid and small cap. The foreign stocks are split between developed and emerging markets, weighted more so towards developed markets.

It can be easy to get sucked into one particular type of fund, one particular investing style. We can be easily influenced by friends, mentors, other bloggers and/or family. Perhaps the inertia to change the stuttering 401k is too great or the analysis-paralysis of too many fund choices is overwhelming. This allocation described above works for OUR risk tolerance, OUR age and OUR life goals. Our portfolio has not always looked like this. There have been points in the past where it did not look as clean and simple. Simple can be good. For someone my age, my own 401k is as simple and “lazy” as they come. Two funds –an equities fund and a bond fund – VIIIX (65%) and JCBUX (35%). Simple can still be diversified enough.

What is the take home message about diversification? I think it can be summed up as follows – Diversification isn’t just about spreading your bets and ensuring that you’re likely to participate in the best performing asset class or strategy; it’s about ensuring that you’re not overly exposed to the worst performer.

Danger of Investing in What You Know

Many experienced financial advisors have espoused the notion of investing in what you know. Peter Lynch of Fidelity fame and Warren Buffett are legendary for their comments on this topic. But often these comments are taken way out of context and lead to extremes. These legendary investors absolutely invest in what they know after doing considerable research.

You love your iPad so buy Apple stock. You love the best jogging gear so invest in Nike. You are a realtor; therefore Home Depot will do the trick. A recent survey suggested 17 percent of all retail investors owned Apple stock, four times the number that owns the average stock in the Dow. You have to think that these numbers exist not because of “considerable research” by the many millions of investors but other factors.

I have been asked by colleagues and friends for stock tips and fund tips in the healthcare sector. You would think that with two decades plus of experience in this sector that I would be squarely in the field of “what you know”. No, not at all. Bear with me as I introduce an analogy that I think applies here. There is a use of marketed pharmaceutical drugs that is termed “off-label”. This is when safe and effective pharmaceutical drugs that are approved by the FDA for use in a specific disease, can be used in a different disease, a different dosage, or different route of administration. It is generally legal unless it violates ethical or safety regulations. What does this have to do with behaviors? Answer – I resist the urge to use my brain “off-label” when it comes to investing. I won’t use it to justify something without considerable research (an approved indication) as that may lead to an undesirable safety outcome (poor performance and/or heightened volatility).

Trust me; I don’t sit here in the high and mighty chair. I have been down the painful avenue with my own investing experiences which I have openly shared on this blog. Experience is what you get when you don’t get what you want.

Back to investing in what you know. As a badge carrying scientist and pharma director, I think I know the pharma area quite well. But I won’t invest in any particular sector of it without a lot of work first. Whatever you decide to invest in, do a ton of homework. And please tread very carefully even if you think you know the area.


There are many things I fear. These include hornets, deadly viruses, Donald Trump, suited-up Wall Street types and sharks. You would be forgiven if you read too much into the connection of the latter three.

Why do we fear things? Isn’t FEAR just a False Emotion Appearing Real. Well, yes and no. Hornets are bad-ass no matter what. Deadly viruses like Ebola will wipe out entire villages in the blink of an eye. I am just recovering from what was diagnosed as influenza (it might also be Lyme, that is another story…..). Donald is, well, Donald. This is not a political blog so enough said. Wall Street analysts / traders I am sure are a mix of cuddly and pit-viper. Cuddly, I can handle. Pit-viper – forget it.

shark_for blog

Sharks? Baby nurse sharks would probably only snuggle you to death. They can be quite cute in their own sharky way. Great whites will have you and your family for dinner given half the chance. Or would they? Did you know that in 2015:

  • 8 people died from shark related attacks
  • 12 people died as a result of taking selfies!! These include people falling off a cliff (1), hit by an oncoming train (3), killed by a live hand grenade (2) and falling down the Taj Mahal steps (1).

I don’t think any shark death was due to backing into the water on Bondi Beach, Australia while holding a selfie stick, but you never know. Six to ten people per year on average are killed by sharks worldwide. Deaths due to hippos, snakes, humans and mosquitos are 500, 50,000, 4750,000 and 725,000 respectively. (Source – Gates Foundation and Center for Disease Control). Crazy world we live in, huh? A little perspective actually does us no harm either.

What’s the point of this little tangent, Mr. PIE?

Simply to say, FEAR is often driven by false information, messaging / reporting from others that lead to a herd-like mentality and in the end emotional decision-making. All of which invariably leads to poor outcomes. And with investing, that inevitably can result in bad situations in terms of how we can maximize our lives. That messaging comes at us thick and fast via social media feeds, sometimes the blogosphere itself, cable and radio. Not saying it is wrong, just what I see. The ideal Index Fund strategy should be this; SWR (Safe Withdrawal Rate) should be that; Asset Allocation: make it look like this. Your real estate approach must contain these elements. You get the picture. The topic of SWR alone has many retirement researchers and key opinion leaders writing very coherently and logically that the 4% rule should really not be treated as the rule any more. The variables of predicting market returns, unknowns about global inflation, understanding the dynamic nature of future expenses and vastly different age groups of extreme/early/late retirees are incredibly complex to boil down to a simple basic formula. That’s the rational answer, in my opinion.

The messaging / reporting can build and build until we convince ourselves there is a one size fits all answer. There never is. Step back, take it all in, use bits and pieces of the varied knowledge and most importantly, apply it all to your own situation that is undoubtedly unique. Do the thing that is right for you. Per the previous topic of discussion, if you have done your homework and research well, you will be enough.

The only thing you have to fear is fear itself.

In summary, I have provided a few simple examples of where bad practices or irrational behaviors can get in the way of our path to wealth and ultimately our life goals. It’s only ourselves that can filter the noise, and recognize the behaviors that can limit the endless possibilities in front of us.

What behaviors do you see as unproductive and hinder your investing approach or get in the way of realization of your goals?



  1. Love the off-label analogy! My biggest hindrance is the desire for instant gratification; I’m terrible at the buy-it-and-wait philosophy of investing espoused by Warren Buffett and others. I need results! And if I don’t see them, the temptation to switch investments can be really strong.

    1. I absolutely hear you and understand why the off-label analogy resonates with you. Glad you enjoyed it. I am inherently impatient and boy is it a struggle at times in the market to keep those demons at bay. Unfortunately, Mrs. PIE is equally impatient but more measured when it comes to the slow steady approach. Together we manage to keep it all in check but it is hard.

  2. Wow, 38% in bonds+cash? That’s a lot, with today’s lousy yields, I hope you’re not holding back your growth. Thanks for sharing!

    About the stocks one knows: Yup, good point. If you invest only in stocks you know, there’s a risk you are heavily biased towards consumer discretionary. Or even worse, invest in the sector where you work and introduce unnecessary additional correlation between your labor income and capital income!
    Another reason to go with an index!

    1. Thanks for the comments Mr. ERN.
      Yes, it is large and in part driven by a couple of things. We had to put Mrs. PIE 401k on serious support to address some bleeding and we rightly or wrongly overcompensated. That is being adjusted and our bonds allocation will drop to around 25% when the dust settles. But that is entirely appropriate for our age, risk tolerance and goals. We have also described in our Q1 update that our cash allocation is overtly high and that will drop to around 5%. I don’t want to be in a position to have to sell any asset classes in FIRE (2 years away) if market takes a significant downswing. Cash on hand is important now to handle major unforeseen event and to ride out any market drops in FIRE.
      A couple of funds we own(as examples) that are either all bond or bond / stocks mix are doing rather well for us and have done so for a while. JCBUX and VWIAX.

      Like your phrase “correlation between your labor income and capital income”. Nicely put.

      1. Wow, thanks for the detailed reply! We are in a similar situation, 2 years away from retirement. We have a hard time putting money into bonds right now, given the low yields (maybe 1% real for corporate, 0% for Treasuries) when the return target is 3-4% real.
        We also rationalize our low bond allocation with bonds appearing to be very risky over long horizons, check this out as food for thought:

  3. I think attempts to time the market or otherwise make hasty decisions are very unproductive and get in the way of proper investing. Slow and steady wins the race, and consistency is required to maximize success.

    It is interesting to look at the various weights of your portfolio. Thanks for sharing!

    1. Slow and steady is hard when you are impatient like me. But managing it better as I get older and hopefully wiser.
      I also enjoy seeing how others construct their portfolio and always take time to understand their unique situation – age, risk aversion, goals etc. Never as simple as the Pie charts make you think.

  4. Wicked-bad – love it! I think another bias is home country bias – eg you have a big chunk of your portfolio in US stocks and I have a big chunk in Australia stocks (although we’d call them shares). And at least in my case it is positively correlated with employment outcomes which is even more irrational!

    1. Glad you enjoyed the phrase. You may get some funny looks using that in your part of the world. I hope my reference to sharks and Australian beaches was not bad form…..

      We see US stocks another way. With so many large US corporations conducting their business overseas such as Apple, Microsoft, Pfizer, Google, Johnson and Johnson, we feel that there is a lot of international exposure anyway.

  5. Well said Mr. Pie! Many folks fall into the trap of investing in certain companies thinking they know them, but not really having done much significant research. I chuckle to myself when I hear people talk about investing in a new company and talk like they think they know it…I highly doubt it though. That ties into your first point, if you don’t have time to do the research then keep it simple and go with mutual funds which are an easy way to get diversified.

    1. Thanks for feedback GS.
      With two kids and two career parents, getting the time to read deeply is brutal. And why we like the simple approach of indexing. A large part of my job is doing diligence on other companies and assets within those companies. I do it for a living and even a small army looking at a single company, you find yourself asking many tough questions and not always coming up with all the answers.

  6. “Experience is what you get when you don’t get what you want”

    That is an awesome line – might have to steal that

    Lot of knowledge in this post – thank you for taking the time to put it together.

    Totally agree with your thoughts on fear – everytime I crack a financial site there are at least 3 doomsday predictions, when you are new to investing it can be overwhelming and you look for reasons to NOT do something.

    1. Thanks for the kind words Apathy Ends.
      Glad you could take something away from it.
      I am a sucker for data, information and it is a trick to separate the wheat from the chaff on those heavy duty financial sites. I actually think I am going to put together a page on our site or perhaps a post in itself with useful, knowledgable and unbiased finance-centric sites out there. There is a ton of great stuff out there and sharing this information with others seems a good thing to do.

      You are 100% right in the analysis paralysis upon reading some of those “doomsday” sites. The sites I mentioned above actually provide mature, unbiased data that offers no judgement or predictions. Just common sense in an otherwise world full of crappy noise.

  7. One area that has held back my returns a little is market timing. For the most part, all my contributions have been automated, but at times I have had extra money that I wanted to invest but waited for the “right time” to put it in. In these cases, I figure my success rate is about 35% at best. Its not so much that I lost money, but the opportunity cost that I could have bought in at a better price had I just set it on automatic. I have been investing using dollar cost averaging for 25 years and my accounts have really grown. My advice is to just set your contributions on automatic and let time and compounding work for you. I dont believe all that time and effort spent researching individual stocks etc will consistantly make a big difference for you over the long run. My accounts just hit 1M. Im no investment guru and never made anywhere near big money. I’ve always enjoyed reading up on finance but the funny thing is I dont feel like I put much effort into it other than the just going work part. I guess the point Im making is that successful investing doesnt have to be complicated or time consuming. I hope this is helpful.

    1. Thanks Arrgo for the thoughtful response. It is helpful and validates much of what we have done and do.

      We have been maxing out / compounding in both 401k’s for 18 years. The accounts have just grown and grown and right where they should be, even with the lost decade 2000-2009 factored in. We dollar cost average into our taxable and college plans monthly. Any stock option windfalls, bonuses go straight to Vanguard. We never try to time this.

      Over the last few years we have got more comfortable with al our investment pools and I have personally enjoyed reading and learning a ton. The amount of quality stuff out there if you are prepared to even dig a little is amazing. The retirement planning materials are especially helpful with so many wise folks sharing their wisdom.

  8. Your allocation looks pretty similar to mine. Or at least how mine looked until I started liquidating high-priced mutual funds to reinvest into lower cost ETFs. I’ve been slow to get the money reinvested and of course, the market has been outperforming during that time while I watch from the sidelines.

    I have also been in healthcare for over 20 years. I have made money a few times investing in the space, but only when I was investing in my own company which I knew was way undervalued and why.

    In general, I have had the most success when I invest the money into a mix of index funds or a target date fund and leave it alone – 401(k)s and 529s, specifically.

    Since starting my site and getting more active reading others, I have started to look more closely at the Dividend Growth model of investing. I do like the idea of receiving a dividend even during those down periods.

    1. Bummer to watch from the sidelines during recent period. And I understand your desire to minimize fees though.

      We still need to tweak Mrs. PIE 401k which will up our stock allocation a bit.

      Like you, we are intrigued by the dividend growth model but not sure where to start educating ourselves. Any good sites you have come across and recommend?

  9. This was a fascinating read since we could see where your investments were allocated. It was surprising to see how much you have sitting in bonds and that you like to try and time the market.

    We have about 10% in bonds/cash and 90% equities, and are invested mostly in Vanguard’s low cost index funds. We find the returns decent enough. We don’t mind the high risk.

    We are staying away from REIT’s where my parents lost $400,000 during the market crash. They weren’t able to recover their losses where their fund went into foreclosure, so we are a little intimidated by those.

    1. Thanks FE.

      Our portfolio allocation is actually quite aggressive given our age and proximity to FIRE. It should be around 45% bonds according to classical investment theory ( your age in bonds). Check out the Bogleheads forum and wiki for some good discussion on portfolio allocation.

      I hope my description of lost decade did not come across as timing the market. We never do that. We both maxed out our 401k’s all the way through that decade. And those funds look in real good shape. Any bonuses we get go straight to investments with no dollar cost averaging.

      REITs are interesting and we have talked about them in a previous post. We have some money in two non traded REITs. Both doing ok to good.

      In the last 10 years, REIT asset class have returned 7.4% on average. Only smal caps and large caps have beaten that at 8.4% and 7.9% respectively. The Vanguard REIT ETF is performing well with 7.2% average return over last 10 years. I understand your aversion given the family experience. Everyone took big punches in the 2008 crash, us included.

  10. Hey Mr PIE, I appreciate the graphs and description you have put into this topic.

    Our approach is going to be mostly equities (and REIT) with some cash as an opportunity fund to buy discounted assets when they come along.

    Indexes and bonds tend to follow economies and interest rates, but there are always some individual companies out there that are growing; this is what we are trying to buy for ourselves. There are lots of investors out there following the dividend growth method too, is a good example (but one of very many). Being able to pick a starting yield (Eg 3%) and have it grow for the foreseeable future, regardless of ups and downs in economies and share prices is very appealing.

    I understand your analysis of the s&p 500 like you have, but you can pick any dates. If you’d picked since inception I think the s&p would have won hands down. If you’d chosen to go from 2000 to today..well I’d guess it would be the best if not second best performance. Although stocks are seen as risky, I’d say they are just the most volatile over the short and medium term. Long term they are normally the best performing. I understand your FIRE date is 2 years away, but I assume you’re planning to live for several more decades?

    I don’t want to try to change your thinking on anything, I hope to just share my thoughts. I’m not an economist but my understanding is that generally when interest rates decrease bonds (and indeed all other assets) increase in price – so for the last 30 years as interest rates dropped from 15% to almost 0%, bonds have had a boost. But as interest rates increase again, asset prices would revert downwards in price, which theoretically the bonds would suffer in ‘total return’ of price + income. I’m not an expert on that, it’s definitely worth research though, as the Fed are looking to increase rates again. For me, cash is a safer conservation of money than bonds.

    I’m not in the slightest trying to predict if/when a downturn is going to happen (great time to pick up cheaper assets though :p), of course recessions will happen again and again forever until we live in a Star Trek not-bothered-about-money utopia. Anyway, thanks for posting about this 🙂


  11. Thanks for the detailed thoughts DDU. We love it when folks provide additional insight.
    Agree on the time span and when you choose it, I was only trying to highlight the critical aspect of diversification is needed at all times in a portfolio life span.
    Regarding the bonds projection, let’s see where it all goes. I do understand the interest rate connection if that is where interest rates actually go.

    Our overall goal,us to protect our sizeable portfolio and get enough grow for our needs, legacy.

    Thanks again for your very thoughtful response.

  12. I think people get way too comfortable with past results. The economy is changing rapidly and fundamentally. I’m glad to see so few FIRE bloggers relying on SS in their assumptions, but other things will change in enormous ways, too. Multiple passive income streams will add layers of protection.

    1. Thanks for checking us out. We are certainly conservative in our approach and don’t get sucked into the all equities. We don’t need that level of risk either in terms of needs.

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