Welcome to Cup of Bull, my name is Michael Dunham, Director of Planning here at Fontana Financial Planning, and with me today is Patrick Fontana, founder of the firm.
Welcome to Cup of Bull – Today I want to talk about common investing mistakes. So to start Patrick can you maybe just kick us off with an example of a recent mistake that you’ve seen and I’ll headline kind of the the situation that we find ourselves in it’s it’s March of 2025 and there’s a lot of a lot of stuff in the news lately, tariffs and some picked up volatility and we’re seeing a little bit more turbulence, a little bit more ups and downs than we’ve seen here over the last couple of years. And so people are starting to think about things a little bit differently. So what are some investing mistakes that you’ve kind of heard people bring up or potentially start to make?
So I think of a couple of big reminders that I would give people that are typical investing mistakes or habits or things that just repeat themselves over and over. One is they look at their holdings, either online, on their statement, wherever it is, and where do our eyes go to when we look at that? We go to anything that’s red, you know, what’s down, and that’s where we focus.
There could be 10 holdings and nine of them are up. And the one that you’re attracted to is the one thing that’s down. The reaction, which is kind of counter to the way we want to be is you’re like, Ooh, what do I do with that? I want to sell that. Right.
So as an example, if Tesla is down 40 % and every other holding is up, we’d look at that and that’s the temptation. And a lot of times that’s the wrong behavior, you know, not focusing on any individual company like Tesla, but if a holding or a company is down, the temptation is sell it.
Well, the level of risk on an investment when it’s gone down by 40%, the level of risk is significantly lower. It’s a much better time to own that company. And there’s a term in our industry called anchoring bias. And that’s where a lot of that comes from. People don’t pay attention to would I want to go buy this stock right now and typically if the price is down and valuation is more attractive, that’s a good time to buy it. But they just think I bought it for this and now it’s worth less and therefore that’s going to guide my decision. So that’s a big one.
Another one I think of when we say the word anchoring is the only number that we ever remember is the biggest number. So the high watermark.
We look at a client that invested a million dollars and it’s grown to two and a half million dollars without adding any money. You know, two and a half is the number. It doesn’t matter that they put in a million. They were two and a half and then the two and a half goes to 2.3. And what will you say? What will you think? I lost $200,000 or I’m down $200,000. Well, in reality, you know, you’re up a million three or you’re up a hundred and some percent. That’s the reality.
Our brains are built that way and that’s just common to say and sometimes older folks like me that have been Investing say 20 years longer than a young Michael The Dow the S &P the numbers kind of anchor in our head. I remember when the Dow, you know 100 point down day was huge 100 point up day was huge. Well, look at where the Dow is now a hundred points is literally hardly anything, right? Point something percent.
Now, thousand points is more like a hundred points was for me when I started in the business and there’d be three big down years in a row. Boom, boom, boom, my first three years in the business. And I remember specifically, it’s a hundred point down day. You what’s the market doing? Down a hundred, it was a big deal.
So for older folks that have had some of those numbers in our head, it’s an adjustment, you know, and they see on the news or somewhere, you know, the Dow’s up or down this much and it’s not based on the percentages, it’s a number. And so you got to reflect that, not anchor into the wrong thing. But acting on emotion is a big mistake. To look at what you feel like is lot less important than what the plan that you made and the portfolio that you have and going back to the basics of why do we have this in the first place?
We built a plan, we built a portfolio.
Rebalancing to take advantage of that volatility, you know, is a smart thing to do. Yeah, I think one thing to add to that is just discipline, right? Like the easiest way to remove emotion is to have a process and to be disciplined in following that process and knowing what the plan is going to be when down days occur, right? And that’s one thing that I’d say we try to have a conversation with every single client every time we meet with them around the fact that the market is going to have a downturn.
We call it a red dot. We look at a chart where we show that the S &P 500 on average is down 15 % in any given year at some point in the year. And some of those red dots or those low points are significantly worse than that. And knowing that that’s going to happen and knowing exactly what we’re going to do when that does happen, it makes it a lot easier when those emotional times happen and we’re on the red dot and we say, hey, we talked about what we were going to do.
We’re going to rebalance. We’re going to add money if we have it. We’re going to do some smart financial planning moves. But what we’re never going to do is sell on a red dot
So to sum it up, I’m gonna use my one little term in relation to that, and it’s:
Rebalance until rich. Cheers. Cheers.
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