Breaking the biggest wealth-destroying habits

Rebecca Choo Quan: The biggest driver of long-term wealth is often avoiding self-destructive behavior, and many times what investors should not do flies in the face of conventional wisdom.

Welcome to Season 2 of Better Vantage by Vanguard, a podcast series hosted by Custom Content from WSJ and Vanguard. I'm Rebecca Choo Quan from Vanguard's Investment Strategy Group. I'm filling in for Christine Kashkari of Custom Content from WSJ.

Today we are joined by Barry Ritholtz, co-founder and CIO of Ritholtz Wealth Management and host of the "Masters in Business" podcast. He's also the author of the book "How Not to Invest: The ideas, numbers, and behaviors that destroy wealth and how to avoid them." In Part 2 of our conversation with Barry, we're going to discuss how advisors and investors can avoid self-destructive behavior.

And if you missed it, be sure to check out part one of our conversation with Barry on some of the most common investor mistakes.

Joe Davis: If I'm a listener saying, "OK, Barry, I hear you. I want to get better. I acknowledge I've made mistakes." So I'm asking this even personally, I've made mistakes in my portfolio, sometimes overconfidence, sometimes being too timid. What would you do then to say to get better in those driving skills?

Barry Ritholtz: So first of all, read, read, read is a good start, and there are plenty of books out there. I said, there's 10s of thousands of books and most people are mediocre investors. There's a dozen classics and we all know their names, but there are several books outside of finance that are about psychology.

And when you realize your own limitations, when you figure out, Hey, if I'm reacting emotionally to all this news flow, that's not going to have a good outcome in my portfolio. Warren Buffett said, "Hey, if you have 150 IQ points, you'd be better off selling 30 to someone else. You don't need more than 120." What you really need is the ability to control yourself, to be disciplined. It's not just the smartest person wins, it's the person who's in most control of their reactions to all this fire hose of input.

There was a shocking piece during the—I don't remember if it was the pandemic or 2022—about a young investor who said, "You know, I'm just going to take a third of my portfolio off the table 'cause I'm concerned about this." And my answer was: You're 30 years old, you have three or four decades before... Do you really think in, in 2060, what you did with your portfolio in terms of reducing your growth portion is going to be the right outcome? You have to think in terms of decades, not hours or days.

Rebecca: And it's the same thing with timing the broad market. You have to be right twice when you get in and when you get out. Too often investors are wrong on both sides.

Barry: So you know, it's funny because the easier thing to do, and I have to caveat this up—the easier entry points or exit point to see is the bottom because bottoms are these big events—tops are a long process. Like people gradually, all right, I have enough equities, they start throttling back and other than the 401(k), like their enthusiasm slowly fades. But, bottoms capitulatory events, and the word capitulation literally means surrender... They're easy to see, however, every instinct in your body is telling you to run away. Because we are a very social species. We're primates, part of a tribe.

In the book, I describe us as: We have neither fang nor claws nor armor. We're soft, chewy, and delicious. The only way the species was able to sustain and develop was cooperative. That long evolutionary bit of cooperation means that when everybody is doing one thing, fear of missing out isn't just to the upside. Hey, I don't know what the hell's going on, but everybody is getting out of the market. I'm not going to be the last idiot. I'm not going to be the gazelle that gets separated from the herd. So you're every essence of your being wants to sell at the bottom. So even if you can see it, it is so hard to stick with it. And I've had conversations with people. Hey if you really think you want to buy VOO or VTI at the bottom, put in a good-till-cancel order. Down 30% from here.

I can't tell you how many people I have spoken to and said, "Oh we were down 34% of the pandemic you must have got filled." Long pause. Yeah, I cancelled that right before.

Joe: So that's a way to fight the emotions. Is to do it ahead of time? Pre-fill orders at a certain low price?

Barry: Right. So go back to ‘08, ‘09, right. The market peaked October ‘07, started rolling over in ‘08 fell like 38%, I'm guessing in ‘08, the S&P 500, and then the next leg down in ‘09 right into March was just pure panic selling. And you know, the old joke is markets bottom on bad news.

So if you're waiting for the all-clear sign, it's too late. So the solution is to say, "I don't know when this is going to bottom, but I'm a long-term investor and down 20?, down 30?, down 40%, down 50%. I'm a buyer. So here's some cash and I'm willing to…"

Joe: … pre-programmed already there.

Barry: put this in.

Joe: I do like that.

Barry: A year later, you're annoyed that down 60% didn't get filled at the time. There's an old joke I used to hear a fund manager say, "Hey, the market's a disaster? How are you sleeping? And the answer is, oh, I sleep like a baby. Really? We're down 40%. Every sector is he's like, yeah, I wake up every two hours, wet myself, and cry for mommy. I sleep like a baby." In the moment, it's horrific. And then a year later it's like, why didn't I buy more in March ‘09? Why didn't I buy more in March 2020? Why didn't I buy more in October 2022? If you pre-program it, you don't have to kick yourself from missing that.

Rebecca: There's been a big run up, especially related to AI stocks. Do you think that that is driving some bad investor behavior?

Barry: So, when you delve beneath the headlines, that's the other thing you discover is, a lot of the media isn't especially data savvy. So we've been talking about the Magnificent 7 for four or five years.

Last year in 2025, most of the Magnificent 7 underperformed the market. When I tell people, Hey, only two of the seven beat the S&P 500, they're like, no, that's not possible. Well, it's NVIDIA and oh, by the way, do you remember Google, which in 2024 people came out on TV and said, oh, AI is going to kill Google. This is pure hindsight on my part what I'm about to say... But if we were all a little smarter, we would have said, Hey, Google seems to have figured out how to put maps and directions in all our cars, and they figured out how to make mail so much easier. And they figured out search, and they figured out all these things to say nothing of integrating video broadband via YouTube. Maybe the brain trust at Google will figure out how to use AI to make search better.

So, NVIDIA was the other big performer, and that's been a giant performer for a while. But the other five Magnificent 7 stocks underperformed. That's throughout 2025, and that has continued into this year rather—and I again I'm going to give you credit Joe, rather than focus on the Magnificent 7, the picks and shovels, hyper-scalers, the first phase of the AI build-out, let's talk about the Magnificent 493 that are going to benefit from becoming more efficient, more productive, more profitable.

What's really fascinating is, we are seeing the biggest surge in new company formation over the past 12 months since the pandemic. And the pandemic was we're all stuck at home and we have no choice. Kids coming out of college had to do something. And now what you're starting to see is, I don't need a team of 20 coders and 10 designers. It's me and my idea and a laptop and either Claude or choose your favorite AI. And so, there's no doubt it's disruptive, but where it's going to go is anybody's guess...Other than the efficiency and productivity we've seen in every other technological cycle is likely to move forward.

Joe: We’ve spent a lot of time on the investing side. You talk a little bit about in the book, and you've talked in other avenues, Barry, around the spending side, what are the big things to focus on versus stuff do you think there's too much focus here. Anything to come to mind? Because, as much about being successful as an investor is how much you can put into the market, which is how much is leftover after I have to pay the bills.

Barry: Right, so, yeah, I'm, I'm not a big fan of the spending skulls who wag their fingers every time somebody buys a latte. But the two big levers that move the needles first: How much are you generating in income? You should really be thinking about what can I do to become better, smarter, more successful at my career to generate revenue, within reason. You're obviously not going to add a second or third PhD on the hopes of that bumping your salary. But I think people don't pay enough attention to the income side of their ledger sheet.

And then the other side is: I know it's boring, but it's really true. You have to spend less than you earn, and you have to invest in yourself first. Meaning, you're saving for retirement, you're saving for the house, you're saving for the kids’ college before you go out...it would be really nice to have a fun weekend car, before you do that. Your 401K, your 529s, anything else you're planning along those lines have to be really funded first.

Rebecca: We both have 20-somethings and it's very hard to get this message across to them.

Barry: Well, first of all, at that age, you're immortal, so there's no thinking about retirement. But secondly, listen, if you're going to make mistakes, if you're going to engage in sort of financially risky behavior, the time to do it is when you're 22, perhaps learn from it. You make those errors when you're young, you learn from it, as opposed to making those errors when you're in your 40s, 50s, 60s. And it really is detrimental. So like I'm not a fan of all the crazy gambling nonsense, but if my nephew is a part of a stock picking club at his college, hey, knock yourself out.

Rebecca: Well, let's talk a little bit differently about AI. So right before we decided to come on air, I had a friend tell me she was asking AI when she could retire and to tell her about Social Security. So it seems like many Americans are now getting their financial planning advice from AI. What do you think about that? Is that going to cause more bad behavior or is it a good thing?

Barry: So, when there's a new technology, you certainly want to become adept at using it and learn how it can make you more productive, more efficient. At the same time... So, there's really a perfect example of this was early days of AI. Hey, this is going to replace radiologists and people who read MRIs and x-rays. It's a fascinating op-ed a few months ago about a radiologist who said not only has AI not replaced my job, it's made me much better because what AI excels at is the middle cases, not the extreme in either direction. So, the boring daily grinds that anybody can do within that profession, but it's just really time-consuming…AI is great for that sort of stuff.

So now let's bring this back to financial planning. If you have a really simple set of needs. And hey, I need some help in figuring out how much U.S. equities, how much overseas, which bonds make sense, and of the middle of the road…I imagine AI will get that more or less right. Now, add a couple of kids, a few pieces of real estate, ex-wife…I'm thinking about all the things, Oh, and I have this separate business, and I have this LLC, and this grad, and this inheritance…And I want to leave this money…The more complex it gets, the less confident I think you could be that, Oh, this is looking more and more like that edge case, and you really need a set of human eyes. So just as an example of how sometimes AI can be wrong, I downloaded a Muni portfolio, my own personal Muni portfolio. And then I uploaded it to one of the AI co-working apps and essentially said, What's my ROI, what's my yield? What's my yield to maturity? What's my tax-equivalent yield? All the data points you want to see from a New York Muni SMA portfolio. And what I got back was great. Wow, look at this 7.5% tax-equivalent yield. This is amazing, and my ROI is great, and I started looking at it closely, and it just smells wrong. When I dove deeper, it's like, Oh, it's doing the math wrong. It doesn't understand how to do tax-equivalent yield precisely. It goes out on the internet: show me a formula for a tax equivalent. Some of these questions we ask are really sophisticated and require a thoughtful, sophisticated answer. And very often AI will just brute force the answer, and if it's right or wrong, it doesn't care: Here's your answer. So you always have to verify, you always have to double check that what it's giving you is accurate.

Joe: So let's talk about financial plans, Barry. How important is it? What are the brass tacks? And what are the things that make a really good financial plan?

Barry: So, financial plans are crucial because they give you a sense of where you're going, what goals you want to achieve, and what's the least painful way to get there. You're getting a sense of, Hey, am I on track to do what I want to accomplish financially in my life? Am I buying a house or maybe even a second vacation property? Are all my kids school and even grad school paid for? And am I going to have a comfortable, carefree retirement? So, that the first step.

And then the numbers, the inputs you put into that are going to give you a sense of how much risk you need to take to have a high probability of achieving those goals. And very often that plan will say, Hey, even if we max out, even if you're equity only and no fixed income or anything else, you may not achieve your goals. It'll force the household to say we need to throttle back our spending. We need to save a little more. Maybe the second person in the house needs to take a job, and we can't just be a one income household. Whatever those conversations are, at least laying it out gives you a sense of what's going to happen. And, and sometimes it's the other end of the scale. I can't tell you how often I've had conversations with clients who are like, Hey, go buy that beach house, boat, car.

Rebecca: They don't spend,

Joe: They don't spend.

Barry: A household is like, We want to take the whole family, the extended family to Italy, but we're afraid it's going to cost us multi six figures. It's like you could do that twice a year for the next century. You're not going to run out of money, knock yourself out. The transition from work and save and work and save and work and save to, Oh, I can throttle back and enjoy a little bit of the money is, a challenge. And along with that comes the portfolio adjustment with, Hey, you've achieved enough money. There's a reason we say three generations from shirtsleeves to shirtsleeves is, getting rich and staying rich are two very different skill sets, and getting people to think about: I need to reduce the amount of equity I have and have some risk-off assets that will just throw off—especially tax-free yield—is a smart way to make sure the wealth stays there generation to generation.

Rebecca: So you both shared a few regrets today—stock picking. But you do talk about trying to minimize those regrets. Can you tell us more about that?

Barry: Yeah. Very often someone will show up with a big pile of a concentrated position. Sometimes it's stock options. It happened a couple of years ago with some crypto, and they're just paralyzed. They don't know what to do cause on the one hand, they think if they sell it and it keeps going up, they'll be unhappy. On the other hand, if they don't sell it, it goes down...They'll be miserable. What do I do?

And so, rather than think in terms of: How do I maximize my return, which is really going to be dependent on an inherently unknowable future path—instead think about, Hey, how am I going to minimize the sort of regrets I have later in life when I look back and say, Oh, I would have, could have, should have done this. And so, it really depends on the circumstances, the dollar amounts involved.

I had a buddy from grad school started working at a company that got bought by Yahoo immediately. And his stock, I want to say it was about 30% of his stock vests back in the day when Yahoo was $250, and they had a very large well-known investment bank as their advisor. And he said, I don't know what to do. And to me the regret minimization framework was perfect. Alright, so this is tens of millions of dollars back in the 1990s - $10 million was real cash. It's enough money that you pay off your bills, your mortgage, your student loans, your car loans, you pay for the kids’ college like life-changing amount of economic freedom. I go, so if you do that and the stock keeps going up, how do you feel about cutting loose one-third of your Yahoo stock? Well, I still own two-thirds. If it goes up, that's fantastic.

All right, well, what happens if the opposite takes place. What happens if you don't sell and the stock crashes. And at the time, I can't say for sure what's going to happen. I had my suspicions, but nobody knew for sure. He goes, Well, if I don't sell, not only did I not sell the 30%, the other 70% is junk also. I'm going to be miserable.

OK, so in one circumstance you have life-changing amount of money, and it keeps going up and that's great. And in the other circumstance, nobody is happy. That's a pretty easy regret minimization.

Joe: I like that regret minimization. It's kind of scenario analysis in the macro market size.

Barry: Now the challenging version of that, someone walked into the office with $40 million in Bitcoin and a UPS delivery driver. I don't know what to do. Well, that's easy. If you sell everything, and it keeps going up, how do you feel? I feel bad. And if you don't sell everything, and it goes down, how do you feel? I feel terrible. So does selling half check the boxes?

If you sell $20 million, pay your taxes, pay for your kids’ college, pay for your mortgage, go on a really nice vacation. You were complaining about, you want to drive a nice car, $20 million is a lot of money, and now you still have a chunk that if it goes up or down, it doesn't matter. You've already changed the quality of your life. The goal isn't to max out the returns. The goal is to not look back when you're 70 years old and say, oh what did I do? We could have all been so much more comfortable if only I made a better decision.

Joe: That's what we should have done with our Apple and Amazon…

Rebecca: I somehow think that this works well outside of the investing world too in your personal life. So I like this framework.

Barry: You have to lay out: What's the best-case scenario? What's the worst-case scenario? We don't know which happens, but what can I do to make sure that regardless, I don't end up in either entity, either outcome, I don't end up really unhappy?

Rebecca: So Barry, we want to turn the tables on you a little bit. On your podcast, you always end by asking a few questions of the guests.

So we wanted to ask you those questions. So, the first one is, was there a mistake you made earlier in your career that you now use to teach others?

Barry: So, compounding is probably the biggest mistake that, when you're young, you just don't realize the impact of compounding and not just equities, compounding skill sets, compounding reading and learning, compounding building a team of people around you, friends, family, colleagues, all these things compound over time. Try not to interfere with that.

Rebecca: What's one piece of advice you would have given your younger self?

Barry: It's a long road. You have to really think about your career, your investments, your personal relationships, your family relationships, in terms of decades. I speak to a lot of college kids. They're so concerned about what their first job is out of college. I was out of college, out of grad school...And it turns out, it really doesn't matter. If you get into the field you want, and you are useful and valuable to your bosses and your colleagues, it really isn't significant. Thinking in terms of decades, thinking in terms of multiple steps—as a 21 year old, that was just unfathomable to me. That's the advice I'd go back and tell my younger self, Hey, it's a really long run. The days are long, but the decades are short. But think in terms of not this week, this month, you have to be a long-term planner even in your career and your personal relationships.

Rebecca: That's great. I tell my daughter this all the time. She's very nervous as a rising senior in college.

Barry: By the way, the other thing is: and layoff the carbs. That would have been the other advice to my younger self.

Joe: You’ll get heat for that. But Barry, I want to thank you because you're look to in the industry…But what I've always found powerful from you is you have powerful insights, sometimes because they're simple, but they're direct and they're actionable. And I think we heard some of that today, Rebecca, right? Both the things to minimize and then the things to maximize. You’re helping industry professional investors, smart investors get a little bit better on our craft. So I want to thank you today.

Barry: Well, thank you. We talked a lot about AI…I'm hopeful that all the hallucinations we're seeing in AI are going to make people more aware of that. Oh, I really have to verify where this is coming from and making sure it's a reliable source and not just a hallucination.

Rebecca: Barry, thank you so much for being here.

This concludes season 2 of Better Vantage by Vanguard.

Christine Kashkari: If you enjoyed this episode and found it helpful, subscribe and share.

Notes:

All investing is subject to risk, including the possible loss of the money you invest. Diversification does not ensure a profit or protect against a loss.

Past performance is not a guarantee of future returns. The performance of an index is not an exact representation of any particular investment, as you cannot invest directly in an index.

This content was created by Custom Content from WSJ, a unit of The Wall Street Journal Advertising Department.

Visit vanguard.com to obtain a Vanguard fund prospectus, or, if available, a summary prospectus, which contains investment objectives, risks, charges, expenses, and other information; read and consider carefully before investing.