Barry Ritholtz highlights 'How Not To Invest' in new book

There is practically no shortage of books explaining how to invest. Multiple libraries could be filled solely with the works of authors telling people what to do with their money and how to manage their finances.

For wealth manager Barry Ritholtz, that one-sided market provided the spark for his recently released bestseller How Not To Invest.

“Think about all the strategies that are out there, all the things people try and do when they're in ‘how to’ mode. ‘Here's how to pick stocks, here's how to time the market, here's how to generate passive income owning real estate.’ And you do all these things. And yet most of us are still pretty mediocre investors,” Ritholtz told InvestmentNews.

Instead, Ritholtz, co-founder of Ritholtz Wealth Management, espouses in his new book the seemingly novel idea of attaining investment success by avoiding the bad ideas that cause investors to lose money. That includes understanding the numbers behind the market’s ebbs and flows, as well as the misleading math that often leads investors astray.

For example, Ritholtz points out research showing that 31 percent of panic sellers never return to stocks.

“Think about what that means,” Ritholtz said. “After the financial crisis of 2008 and 2009, all the people who panic sold in January, February and March of 2009, nearly a third of them said, this stock thing isn't for me. And then they missed one of the greatest decades in stock market history.”

Another piece of ‘how not to invest’ guidance Ritholtz advances in the book is the idea of avoiding bad advice entirely. The question then arises, however, as to how an investor can identify and separate the good advice from the bad.

On this matter, Ritholtz suggests creating a list of “all-stars” who not only are self-proclaimed experts in their space, but have been doing it long enough that they have a well-established track record.

“You can see there's a thoughtful, intelligent process behind their decision making, and that's they've been a whole lot more right than wrong than over, over the years. And when they're wrong, they own it,” Ritholtz said.

Not investing emotionally is another big "how not to" for Ritholtz. In a chapter of the book titled “Why Politics and Investing Don’t Mix,” he debunks the idea that investors can achieve superior returns if they invest according to their most fervent political beliefs. And he also urges investors not to react with their gut instincts, especially in the middle of a market blowup.

“Panic-selling is easy, getting back in at the lows is hard, not getting back is ruinous,” Ritholtz writes in the book.   

Despite all the painful unforced errors they tend to make, investors have been protected somewhat by the market’s move toward ETFs. The overall shift toward diversification and away from single-stock risk has certainly helped save investors from themselves.

That said, Ritholtz does admit that buying and holding ETFs does take some of the fun out of investing process for certain trader types. For those folks, Ritholtz recommends setting up a small “cowboy account” of up to 5 percent of one’s liquid net worth to pick individual stocks, trade options or market time.

“If it's a disaster, well, thank goodness it wasn't all your money. It was only a small percentage,” Ritholtz said.

Finally, despite all his tips about investing behaviors to avoid, Ritholtz does pile onto the sensible, long-held recommendation that investors should base their portfolios around low-cost index funds and work outward from there.

“Everybody who's picking stocks or market timing or trying all these new products, they're chasing alpha. They're chasing market outperformance. But you can't generate alpha if you're not at least starting with beta with the market gives you,” Ritholtz said.