Investors' Biggest Self-Defeating Mistakes When Attempting to Beat the Market

Index investing pioneer Charley Ellis maintains that the fundamental reason behind the success of index funds remains valid today: "It’s virtually impossible to beat the market," he told CNBC’s Bob Pisani on last Monday’s “ETF Edge.”

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Ellis also highlights another significant challenge for investors beyond the long-term underperformance of active management: their own behavioral tendencies. According to him, many investors unknowingly become their own worst enemy when managing their portfolios.

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Market volatility, complexities, and countless external factors contribute to unpredictable price fluctuations, but an investor’s mindset plays a crucial role in determining financial outcomes.

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In his latest book, “Rethinking Investing,” Ellis explores numerous unconscious biases that influence how people perceive money and market behavior. Some of the key biases he discusses include:

• Gambler’s Fallacy: The mistaken belief that past success in picking stocks guarantees future success.
• Confirmation Bias: The tendency to seek information that reinforces pre-existing views.
• Herd Mentality: Following the crowd without independent analysis.
• Sunk Cost Fallacy: Persisting with failing investments due to prior commitments.
• Availability Bias: Being overly influenced by readily available information, regardless of its actual relevance.

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Ellis argues that these biases can significantly impact portfolio strategy, making it essential for investors to reconsider their approach to the market.

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“Instead of trying to get more, try to pay less,” Ellis advises. “That’s why ETFs ... have made such great sense.”

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Research indicates that ETFs generally have lower fees compared to actively managed mutual funds. Additionally, traditional index mutual funds, such as S&P 500 funds from Vanguard and Fidelity, offer extremely low fees, with some even waiving management fees entirely.

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Ellis believes that investing in lower-cost funds while addressing behavioral biases can help investors achieve strong long-term financial outcomes.

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“They’re boring, so we leave them alone, and they do work out over the long run, very, very handsomely,” he said.

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Veteran ETF expert Dave Nadig, who joined Ellis on “ETF Edge,” echoed this sentiment.

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“People trying to predict people always works out terribly,” Nadig remarked. A long-term investment in an index fund “helps you overcome an enormous number of these biases simply because you’ll pay less attention to it.”

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Nadig also pointed out a common mistake investors make—attempting to time the market, often leading to self-sabotage. “There are more good days than bad days,” he noted. “If you’re missing the 10 best days in the market and you missed the worst 10 days in the market, you’re still much worse off than if you just stayed invested. The math on that’s pretty hard to argue with.”

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As an additional mindset shift for those planning for retirement, Ellis suggests viewing Social Security income differently. By adjusting their perspective on retirement savings and income streams, investors can make better financial decisions for the long term.

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