EP 269: The Investing Mistakes Even Smart Investors Make

by Peter Lazaroff | Aug 12, 2026 | Podcast

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Building a low-cost, diversified portfolio has never been easier. But easy access to good investments is not the same as knowing how to use them well.

In this episode, I’m joined by Liz Muirhead, a senior portfolio strategist at Vanguard who has spent 29 years at the firm. We discuss why individual bond ladders often provide more psychological comfort than economic advantage, where active fixed income can add value, how mega-IPOs enter indexes, and why broad diversification means you may already own tomorrow’s market leader.

We also explore factor investing, security-level tax-loss harvesting, and Vanguard’s Advisor’s Alpha research. The central question is what investment management still requires once the basic portfolio can be built cheaply—and why behavior, taxes, rebalancing, life transitions, and peace of mind remain difficult to commoditize.

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What low-cost index funds solved—and what they did not (00:15)

Liz begins by sharing the path of her 29-year Vanguard career. She started in the back office, spent 17 years evaluating investment managers, and now works directly with advisors on markets, portfolio construction, and ways to improve their models.

We then turn to Jack Bogle’s most important breakthrough. Index funds gave ordinary investors access to the kind of broad, low-cost diversification that had once been reserved largely for institutions.

But access did not eliminate the human side of investing. Owning the right products does not guarantee that someone will use them appropriately, stay disciplined, or adapt the portfolio when life changes.

Liz compares it to buying an entire gym system for your basement. The equipment may be excellent, but you can still benefit from someone showing you how to use it, correcting your form, and helping you avoid an injury. That distinction—between having the tools and using them well—frames the rest of our conversation.

When individual bonds do—and do not—make sense (04:21)

I ask Liz about one of the most persistent misconceptions in fixed income: the belief that an individual bond is safer than a bond fund because the investor knows how much principal will be returned at maturity, assuming the issuer pays as promised.

Liz acknowledges that individual bonds can be useful as a behavioral tool. Their market values change every day, just like the holdings inside a bond fund, but those changes are less visible. Not seeing the fluctuation can make it easier for some investors to stay with the plan.

The tradeoff is that many individual-bond portfolios sacrifice diversification, liquidity, professional trading, and efficient ongoing reinvestment. For a retirement portfolio with an uncertain time horizon, maturing bonds generally need to be replaced. A bond mutual fund or ETF is already doing that work continuously while spreading the portfolio across far more issuers and securities.

There is a legitimate role for an individual bond ladder when a known asset is being matched to a known liability. Liz uses college tuition as an example: if a bond matures each year that a tuition bill comes due, the proceeds have a clear destination.

But when the money will simply be reinvested, the apparent certainty can obscure reinvestment risk and opportunity cost. Liz notes that individual municipal-bond portfolios often concentrate in shorter maturities and the very highest credit ratings, potentially giving up yield and the relative-value opportunities available in a broader investment-grade portfolio.

Performance blind spots and the case for active fixed income (08:04)

The discussion of individual bonds leads to a broader problem: many investors do not actually know how their portfolios are performing.

Calculating a time-weighted return is not intuitive, and many custodial websites do not present performance in a way that makes it easy to compare an investor’s experience with an appropriate benchmark. Bond-trading costs add another layer of opacity because those costs are generally embedded in the yield rather than shown as a visible expense.

We then discuss why active management may have more room to differentiate in fixed income than in stocks. A company such as General Motors has one common stock but can have hundreds of bonds, each with different maturities, structures, yields, and prices. Across the bond market, that creates tens of thousands of securities for managers to compare.

A skilled manager may find that one bond offers better compensation than another bond from the same issuer. That kind of relative-value analysis is difficult to replicate in a small individual portfolio.

Liz is also careful to point out that active management only helps if the value is not consumed by fees. Because the excess return available in fixed income is limited, a high-cost manager may need to take more risk simply to overcome the fee. Vanguard offers both active and index strategies, and her point is not that one approach is always superior. Cost, implementation, and the source of the expected return all matter.

Why a mega-IPO may barely move your index fund (12:55)

SpaceX provides a timely example of how headline valuations can mislead investors about the effect of a mega-IPO on an index fund.

Index weights are generally based on free float—the shares actually available for public trading—not the value of every share held by founders, employees, and other insiders. A company can therefore receive an enormous overall valuation while initially representing a much smaller part of a broad index. Vanguard’s analysis ahead of the offering expected only around 5% of SpaceX’s shares to be available to the public at first.

Liz explains that the early index weights for SpaceX were far more modest than many investors expected from the headlines. The same principle is likely to apply to other large private companies that go public with only a limited portion of their shares available for trading.

Liz explains that companies like SpaceX may go public partly to give existing owners some liquidity and diversification. It does not necessarily mean those owners are selling their entire stakes. For a diversified investor, the practical impact of even a historic IPO may be much smaller than the attention surrounding it.

Why you may already own the next Nvidia (15:15)

The excitement around IPOs leads to a discussion of individual-stock investing and the shortcuts people use to choose what to buy.

In everyday life, looking at restaurant ratings or checking the weather forecast can be useful. In investing, relying on social proof, recent performance, or the stock getting the most attention is much less reliable. Those signals mostly tell us what has already happened.

Liz likes to ask audiences whether they would have wanted to own Nvidia in 2003. Nearly every hand goes up. She then asks who held an S&P 500 or total-market index fund. Those investors already owned Nvidia by then: it had entered the S&P 500 when Enron was removed.

We do not know which company will become the Nvidia of the next decade. But in a broadly diversified portfolio, there is a good chance we already own it. That is one of the underappreciated advantages of indexing: investors do not need to identify every future winner before the rest of the market does.

Why indexing versus factor investing is ultimately a behavior question (17:52)

I explain why the case for indexing does not require markets to be perfectly efficient. Bogle’s cost-matters hypothesis is simpler: the less investors pay, the more of the market’s return they keep.

At the same time, market exposure does not explain every difference in stock returns. I compare the evolution of investment research to the way baseball moved from judging fastballs by sight, to measuring velocity, and then to analyzing spin rate, movement, and release characteristics. In investing, researchers have identified characteristics such as value, size, quality or profitability, momentum, and volatility that may help explain differences in expected returns.

An index investor largely accepts what the market delivers. A factor investor deliberately emphasizes one or more of those characteristics in pursuit of a different risk-and-return pattern and, for some factors, a potentially higher expected return.

The evidence alone does not settle which approach is right for a particular person. Factors can trail the broad market for years. If that underperformance will cause an investor to abandon the strategy and chase whatever is working, a simple index portfolio is likely the better choice.

That makes regret minimization and persistence central to the decision. Liz invokes a Bogle principle: the pursuit of a perfect plan can become the enemy of a good one. The best portfolio is not merely the one that looks optimal in a spreadsheet; it is the one an investor can continue to hold when its differences feel painful.

Implementation matters too. Providers can define “value,” “quality,” and other factors differently, then build products around those definitions in different ways. Moving beyond broad indexing creates opportunities, but it also creates more ways to make a mistake.

Why tax-loss harvesting becomes more powerful at the security level (23:57)

Tax-loss harvesting is one area where educated investors generally recognize the potential value, but the way the strategy is implemented makes a major difference.

Traditional tax-loss harvesting often happens at the fund level. If an investor owns an S&P 500 ETF, for example, at least one ETF tax lot must be trading below its cost basis before that loss can be harvested. That is more likely to occur after a broad market decline.

A direct-indexing separately managed account owns many of the underlying stocks instead. That makes it possible to sell individual companies trading at a loss even when the overall index is up. The conversation uses beverage and aircraft companies as simple illustrations of how a portfolio might maintain similar exposure, although actual implementation must account for wash-sale rules, tracking error, and the investor’s overall portfolio.

The frequency of the review matters as well. Daily monitoring can find brief opportunities that a quarterly or annual process may miss. Periods of sudden volatility can create losses at the security level even when the market’s full-year return ultimately ends up positive.

Those harvested losses can offset realized capital gains, including gains created when a retiree begins drawing from a portfolio with substantial appreciation. The strategy often defers taxes rather than eliminating them, and its value depends on the investor’s tax situation, the availability of gains, the costs involved, and the quality of the implementation. But technology has made a level of tax management that was once difficult to scale available to a much broader group of investors.

Why an advisor’s value is lumpy—and often invisible (27:55)

We spend the final third of the conversation on the 25th anniversary of Vanguard’s Advisor’s Alpha research.

Investors often assume an advisor’s primary contribution is selecting investments. Vanguard’s framework takes a much broader view. It includes building and maintaining an appropriate allocation, controlling costs, rebalancing systematically, improving tax decisions, planning for withdrawals, and coaching clients through the moments when fear or greed could derail the plan.

Vanguard estimates that following these wealth-management practices can add up to, or even exceed, 3% in net returns. Importantly, the paper defines that figure as roughly three percentage points over an unspecified period—not a guaranteed annual bonus. The amount varies by client, and much of the value is earned intermittently rather than in a smooth, measurable amount each year.

That is why I describe advice as sometimes earning “a lifetime of fees all at once.” One major behavioral mistake, poorly timed tax decision, or unplanned response to a life transition can outweigh years of smaller improvements.

Liz compares the advisor to a car’s blind-spot monitor. The warning may prevent a collision, but afterward it is difficult to quantify the accident that never happened. In the same way, the most valuable financial decision may be the one a client never makes because someone helped them pause.

Behavioral coaching is especially important because investors move between fear of missing out and fear of what might happen next. Getting out of the market requires being right twice: once about when to leave and again about when to return. In one Vanguard historical illustration, after stocks had lost more than 10% over three months, a hypothetical investor who moved a 60/40 portfolio entirely to cash for the next three months had a 74% probability of underperforming an investor who stayed with the balanced portfolio.

Smart investors are not immune. Some panic; others simply drift. A portfolio that is not rebalanced can gradually become overweight U.S. stocks, large companies, and growth stocks while holding less fixed income and international exposure than intended. The danger grows when the investor’s life, goals, or time horizon has changed along with the market.

Why retirement turns DIY investing into a different job (38:22)

Liz says the point when investors most often ask for help is near or shortly after retirement.

Accumulation has a relatively clear playbook. People can automate contributions into a workplace plan, use a diversified default investment, keep costs low, and continue saving. Decumulation introduces a different set of questions: how much to withdraw, which accounts to use, how to manage taxes, how the allocation should change, how long the money must last, and what should remain for family or charity.

Liz compares the transition to home maintenance. Replacing a light switch may be within someone’s comfort zone, but a breaker that keeps tripping is a reason to call an electrician. A one-time financial review can be helpful, but an ongoing relationship puts the blind-spot monitor in place before the mistake occurs.

She encourages capable investors to approach that decision with humility. Asking for help is not an admission of failure. It can free time, reduce stress, and allow people to spend retirement doing what they saved for rather than continually working through spreadsheets and tax documents.

An objective advisor can also help couples and families navigate decisions that might otherwise become sources of conflict. During volatile markets, the ability to call someone and ask, “Should I be worried?” has real value. Liz describes clients who feared they were down 12%, only for their advisors to show them that their diversified portfolios were down 2%—or even up 2%.

Financial advice is a meaningful expense, and hiring the wrong advisor can create costs of its own. But finding a good advisor you trust can allow you to delegate much of the work—and some of the worry—without giving up control of your goals.

The value that is hardest to measure may be the one clients mention most often: peace of mind.

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