“The most common market take can be described as “person who didn’t see this coming is now 100% confident about what happens next.” – Morgan Housel

I’ve seen some wild stuff over the past twenty years as an investment manager. There’s the usual stuff; market timing, performance chasing, playing the prediction game to name a few.

We hope to go a bit deeper and highlight five of the biggest mistakes investors make (often without even knowing it). The good news is this has nothing to do with hot takes about what the market does next, which means we can course correct before the next market disruption happens.

1. The worst decisions get made in really good markets and really bad markets.

Pretty much every market cycle can be summarized as investors take too much risk during bull markets. Investors take too little risk during disruptive markets.

“Stability breeds instability” is the idea that as people feel good about current economic prospects they tend to consume, take on debt, speculate, etc. The risk-seeking behavior can create imbalances or excesses leading to economic instability.

The idea came from Hyman Minsky, Professor of Economics, Washington University, who stated, “All stable economies sow the seeds of their own destruction.”

The flip side is panic selling during the inevitable difficult market. This is usually a symptom of the previous point; taking too much risk during good times and getting surprising punished when the cycle turns.

A good rule of thumb is to not get carried away chasing winners when investing seems easy. If you’re looking to put cash to work or get more aggressive in your allocation, it’s usually been best to do when it feels deeply uncomfortable and you want to puke.

2. You can’t talk about performance, without talking about risk.

Ask someone how much their portfolio is up or down on the year, they can tell you to the decimal point. Ask them how much risk they’re taking, you’ll be met with a blank stare.

No one thinks about risk management during good times. This isn’t limited to retail investors. I can’t tell you how many times I’ve asked a prospective client working with another advisor to have them provide risk metrics. They come back with a variation of the same thing over and over again, “my advisor doesn’t have access to that information.”

Here’s a simple way to track risk. How does my portfolio hold up when the S&P 500 is down by 15%?

Source: Orion

The above graph shows drawdown (downside movement) of the S&P 500 (blue line) and a hypothetical diversified portfolio (green) during the spring 2025 sell-off. The S&P 500 was down ~17% in one month. The diversified green portfolio did experience a shallow drawdown, however, it held up quite well vs. the broader market.  This is one of the most important graphics we cover during client investment reviews (see “Bear Market Feedback is Gold“).

The most common culprit which makes tracking risk difficult is investors that have seven different accounts, three different advisors, 55 different mutual funds & ETFs, 75 individual stocks. It’s nearly impossible to track risk exposures with a hodge podge collection of investments scattered across accounts, advisors, and various financial institutions (we unpack what clients and prospective clients own by using Koyfin’s AI risk matrix).

3. Huge emotional decisions aren’t free

We get it. Money is emotional. No one wants to see fruits of their life’s work implode during a market sell-off. No one understands the blood, sweat, tears, and sacrifice that went into building wealth more than the person closest to the money.

In our experience, the closer to the money you are, the more emotional things can get. That’s why many financial advisors have financial advisors.

J.P. Morgan published the below chart of annualized asset class returns and what the average investor actually achieved (2002 – 2021)…

Source: J.P. Morgan

The above graph shows annualized asset class returns vs. average investor returns over a 20-year period (2002-2021). The average investor destroyed a ton of value by trading, market timing, performance chasing, etc.

A few examples…

“Sell everything. I’m going to wait and see how this plays out”

“I think a market crash is right around the corner”

“My friend told me to get out of the market”

There’s a very real cost of making large, emotional decisions. The stakes get higher as the dollars get bigger.

I’ve met dozens of do-it-yourself investors that are making hundreds of thousands of dollars in mistakes per year but won’t pay an advisor a fraction of that to professionally manage the assets.

If you have the time, intellect, and emotional capacity to manage your own assets, that’s awesome. If you have the time, but it’s outside your sphere of expertise and you’re an emotional basket case, you’re in for a wild ride. Emotional decisions aren’t free.

4. Identity Crisis

Humans struggle to hold two contradictory ideas at once due to a psychological phenomenon called cognitive dissonance, which creates mental discomfort. This is amplified when an idea goes against our beliefs.

For example, Chuck has a pessimistic view of the stock market. He’s absolutely convinced a big crash is around the corner. He tells everyone from his neighbor to the person next to him at the grocery store check-out line of the impending doom. Chuck has put his money where his mouth is and moved to 100% cash in his portfolio.

Given Chuck’s strong belief and his drastic move to cash, it would be difficult for Chuck to also believe that he might be wrong, and markets could ascend higher. It’s almost as if the market crash scenario is tied up with Chuck’s identity.

A better approach for Chuck might be, “I think markets are due for a correction, but I acknowledge I could be wrong and timing is fleeting. I’m going to stay the course with my long-term allocation.”

This can sneak up on people in weird ways. We see people getting their personal identities caught up in their investment strategy (we call it the Identity Leak). This is a very slippery slope.

I’m a Bitcoiner.

I’m a value investor.

I’m a growth investor.

I’m a dividend investor.

I’m a real estate investor.

I’m convinced the market is in a bubble.

Identifying as a particular type of investor can leave one stuck, rigid, and inflexible to change.

It’s okay to have market opinions or a preferred investment style, however, one might do well to leave room for other scenarios and approach markets with a dose of humility.

5. Trying to be brilliant rather than avoiding stupidity

When the market fell into chaos during the COVID sell-off spring of 2020, many investors were asking themselves, “what should I do now?”

A better question might be, “what should you NOT do now?” That subtle inversion could have saved someone from making a dumb mistake.

The next time the market acts up and you’re feeling confused, anxious, or compelled to act, try asking yourself these questions…

• What would a horrible investor do?
• What’s the worst action to take?
• What could I do now to maximize future regret?

Your next action might become clearer by simply inverting. It’s amazing how much value is unlocked by doing simple, routine things.

Most investors would be better off spending less time trying to be brilliant and more time avoiding obvious stupidity (this mental trick works in other areas of life too!).

If you have questions about Pure Portfolios’ rules-based investment process or want a second opinion on how much risk you’re taking, shoot us a note at insight@pureportfolios.com