3 Myths of Investing: If You Know These, You’re Ahead of Most Investors (Part 2)

Paul Winkler: All right, we’re back here on “The Investor Coaching Show,” Paul Winkler, talking money and investing. Okay, so walking through some myths of investing. If you don’t know these myths are out there, you’re going to be subject to them.

Instincts Plus Emotion

It’s super easy to get people pulled in when it comes to these myths because they appeal to our instincts and our emotions. Our instincts go toward pleasure, go away from pain.

And I often taught a workshop where I would go, “I plus E is greater than C.” And then what I would do is I’d add to that.

I is your instincts, and my instincts go toward pleasure. “I really feel good about this. This sounds good.”

And then emotions. “Oh, this feels really good. I trust these people, they’re well-known. My employer uses them for their 401(k).”

And I’ll often point out some of the biggest mutual fund companies that run 401(k)s, they’ll have literally over a thousand different mutual funds. A lot of them, they’ll use these individual accounts, these separate accounts where you can actually manage your own portfolio. And they’ll say, “We’ll give you nine to 10,000 mutual funds.”

And you go, “Well, wait a minute. ‘We’re going to give you access to nine to 10,000 different mutual funds in your 401(k)?’ How many funds do you really need if you know what’s going to happen next?” That’s just ridiculous.

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It’s just information overload. It’s opportunity overload. They just give you access to everything so you can hang yourself. 

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That’s kind of the way I look at it. So often, the way things are, to simplify it, just choose based on track record, right? Well, let’s look back through history, and let’s just say we’ve got the track record.

We’ve already established that the professional managers don’t repeat. We’ve talked about how they’ll try to pick which companies out of the large U.S. companies are going to be the best going forward. They may get lucky, but they don’t repeat, is what we find.

Areas of the Market

Well, what about areas of the market? Now, this is something that my friend, business owner, 401(k), his employees come up to him and say, “I’ve got this S&P 500 fund and it’s done so well. Can’t we just do that?” And he says, “You don’t want to do that.”

Well, let’s go back to, oh, let’s go back to the late ’90s. And literally, when we talk about large companies, small companies, large value companies, small value companies, international large companies, international small companies, if you look at from 1970 going forward, you look at say, well, how often did large U.S. stocks have the best returning area of the market?

It wasn’t in 1970, nor was it in ’71, ’72, ’73, ’74, ’75, ’76, ’77, ’78, ’79, ’80. You get the point, right? It wasn’t the top-performing area of the market in any of those years. It wasn’t in 1981, ’82, ’83, ’84.

It took all the way until 1989 before that was the top-performing area of the stock market. And that’s the one you hear in the news all the time. You hear about the DOW, you hear about the S&P 500, you hear about the Nasdaq, you hear about large U.S., large U.S.

But literally, we’re going from 1970 all the way to 1989 before it was even the top-performing area of the market. Wow.

Well, did it continue to go on and do well? Well, no, 1990 it wasn’t, 1991 it wasn’t, 1992 it wasn’t, 1993 it wasn’t, 1994 it wasn’t, 1995 it wasn’t.

Where are we? We’re on the mid-’90s. You remember the tech bubble?

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Even still, the S&P 500 was not the top-performing area of the market. It didn’t hit top-performing status until 1998. 

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That’s when we started hearing about it. We started hearing about large companies and tech companies and these great, wonderful growth companies at that point in time. Now, the funny thing was it didn’t even repeat in 1999. Small companies were the top-performing area that year.

Then you go to 2000, and what happens? It goes down 9%, 2001 down 12%, down 22% the year after that. And in the year 2000, you had value companies up 10% plus during that particular year.

And then you get to about 2003, and nobody’s talking about large U.S. Nobody’s talking about it anymore. You couldn’t give the stuff away.

It didn’t hit top-performing status again until 2014. Not until 2014 was it the top area of the market of all the ones that I named.

Then go forward, and two years in a row, 2023 and 2024, the S&P 500 was the top-performing out of those six asset categories that I named. Seven, actually, because I had micro-caps in there, now that I think about it.

Familiarity and Recency Bias

So if you look at that, you go, “Wow, why is it that we hear about that all the time?” It’s because those companies are the most familiar to you. And we call that familiarity bias. We’re biased toward things that we recognize.

Let’s face it, everybody recognizes who? Apple, Nvidia, and Amazon and large companies like GE and Coca-Cola. We recognize those companies.

We know who they are. We shop there. We buy their stuff.

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So that’s why these indexes are so well-known: because it’s all the indexes of big companies. 

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But recognize, as I said, you didn’t have the top-performing status until 1990, 1989, and then not until 1998 again, and then you had to wait all the way to 2014, and then 2019 and 2023, 2024. So this is the issue with past performance. Now, because it’s recent history, 2023 and 2024, you have another psychological bias, and it’s called recency bias.

Investors, folks that would be dealing with the 401(k)s and things like that and employees of companies, would be enamored with large U.S. stocks. Why? Two reasons.

Recently they had done well. No, not in 2025, not comparatively. They did okay. But there were other areas of the markets that are way, way, way better so far in 2026, but nobody hears about them. Nobody talks about them.

But here’s the thing: number one, good past performance, number two, extremely low cost to manage. And that’s what gets people’s attention.

And mutual fund companies know that if they say, “Hey, something’s low cost,” let’s say something’s on sale at Kroger, or something’s on sale at Home Depot or whatever, that it will attract your attention. And if you can combine that with good recent past performance, you’ve got a marketing message that will sell.

So that’s basically what’s going on here is our instincts go toward pleasure and then our emotions. I guess emotion, yeah, it’d probably be emotion.

“Get one over on the man. I want something for nothing. I want something cheap. I want something because I want to be seen as a smart consumer, especially if I’m talking to my friends and I go up and say, ‘Oh yeah, I’ve got a really low-cost investment portfolio.’”

We want that. I mean, who doesn’t want to feel like people respect them for their level of knowledge and prowess and investing?

“Wow, you’re really smart. You do that? I read about that in XYZ Financial Magazine. You seem sophisticated.”

And people like that. But the reality of it is just recognize that it’s marketing, and maybe somebody’s getting one over on you.

This is why I think the education process is so important. Once you understand this stuff, I find that the people that I’ve taught over the years, they come back and go, “Wow, this just makes so much sense, and I can’t get my friends to listen to what I have to say.”

And I’m like, “Well, yeah, you’re running an uphill battle. It’s hard for me to get people to understand this stuff and let alone you being a layperson trying to explain it to them. So I get it.”

All right, I’m going to take a quick break, be right back after this. I’m going to continue on with just another myth of investing. I want to walk through a couple of them, a couple of things I think are really important, and we have this tendency as Americans to be very U.S.-centric, and that can be a huge mistake.

The Myth of Market Timing

Just walking through a couple of things. When we talk about market timing, that’s another myth. I really hadn’t hit that a whole lot.

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Market timing is the idea of changing an investment portfolio based on a prediction about the future. 

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What do you think is going to do well in the future? We talked about how stock picking doesn’t work, right? And you look at market timing, it’s bad.

The results. There was a study that was done on that going back to the year-end in 2023, active funds versus benchmarks, and they were engaging in this type of management. And it was, again, 90% in one area of the market, 100% in another area of the market.

Let’s see. Let’s just take a cursory look at this one: 89.09%, 91.3% in another asset category, 75% for municipals. And they’re just not doing very well as far as figuring out where markets are going to go.

But you’ll see these fund companies do these charts. They’ll be looking at charts and trying to figure out how to analyze the market and looking for head and tails patterns — head and shoulders of patterns, excuse me. And you can’t make heads or tails of it. That’s where my head was going.

But they don’t do very well. I mean, it’s just pretty bad. But, yet, people think that the media has this ability to do that because they turn to the media, they turn to these professionals, for predictions to protect themselves against what might be coming.

It’s appealing to think that maybe somebody knows what’s coming next so I can protect myself from it. And then when there’s a workshop I teach where I go back to the 1930s, and I go through the 1940s, and I go back to the 1970s, and I go through different decades and show that the investment industry’s never been able to do this. They’ve never been able to figure this stuff out.

Real Money Investors

There’s one that’s really kind of funny. It was the New York Stock Exchange CEO, and he’s asked about what he thinks is going to happen in the stock market in 2009.

And he says, “Well, you know, the big money investors were really cautious in March, and they think another rally is going to happen in June or July.” And the thing that I like to point out is like, well, they missed the March upturn, which was 8% for large U.S. stocks and 11% for small in one month. They missed that.

Well, if they’re not going to get back until June or July, they missed the April upturn in large stocks of 9% and 24% for small companies. And they’re not going to, in May, they missed that because they’re not going to get back in until June or July.

According to him, they’re the “smart” or the “real” money investors, is what he calls them. They missed May, presumably. That went up another 5%, another 11% for small companies, for a total combined missed return of 25%, almost 26% for large and 53% for small.

And you go, “Wow. If that’s what the real money investors do, what do the fake money investors do?”

When you see this kind of stuff, you’ll see there’s an article that was in Market Watch talking about how a “one-two-three punch could drop stock 30% in 2016.” And they had all kinds of good reasons why that would happen. Yet small caps went up 28% and large companies went up 12%.

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So their ability to time the market is just abysmal. It’s really bad. Why? Because nobody knows what the news is, and news is what drives stock markets. 

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That’s really it. And one of the things that happens with the investing industry is they have so much to gain. You look at the management fees on your mutual funds and you think that’s the sum total of all your expenses. And often what I’ll point out is, no, that’s not it.

Expenses in the Investing Process

There are all kinds of other expenses in the investing process you’re probably not even aware of. You have bid-offer spread costs. You have survivorship biases and other kind of a different type of an expense.

What happens to securities lending revenue? What happens to momentum, and how does that affect expenses?

Mutual funds, are they paying any commissions? You can have commissions inside of things. How are they routing the orders? How is the investment firm routing the orders?

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Are they going to the lowest cost market maker out there? Do you even know that? Do you know if that’s what’s happening?

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How about the hidden expense of lost opportunity costs because of portfolio and index fund overweighting of bigger companies versus smaller companies? Or are they overweighting growth companies in the portfolio versus value? And 96% of 20-year periods value does better than growth. I mean, you’ve got a pretty good shot that maybe overweighting the wrong area can be a problem.

What if they’re not rebalancing on a timely basis or they’re not rebalancing in the most efficient manner? So when I rebalance a portfolio, if I have 10% of my money in one area of the market and 10% in another area of the market, I don’t always want to go and rebalance unless the deviation from the target is big enough that the expected benefit outweighs the cost.

Well, is that being done? And most people will sit there and shake their head and go, “I don’t know. I hope they’re getting that done right.”

And I’m going to tell you, I worked for the big investment firms, and literally every one of us, Evan, Jonathan, Jim, Arlene, Dan, all of us, we all worked for the big investment firms and different types. Some banks, some worked for mutual fund companies, some worked for insurance companies, some worked for the big brokerage houses. The reality of it is, we never talked about that stuff. I didn’t have a clue it existed.

If it hadn’t been for my penchant for just going and getting as informed as I possibly could about investing, because I felt it was my duty, I wouldn’t have known about it. Now you know a little bit more about it.

Advisory services offered through Paul Winkler, Inc an SEC registered investment advisor. The opinions voiced and information provided in this material are for general informational purposes only and not intended to provide specific advice or recommendations for any individual. To determine what investments are appropriate for you, please consult with a financial advisor. PWI does not provide tax or legal advice. Please consult your tax or legal advisor regarding your particular situation.