Emotion has done more damage to American portfolios this year than the market itself, and a new Charles Schwab guide breaks down the mistakes behind one of the widest investor-market gaps of the past decade.
The guide, ‘5 Common Money Traps and How to Avoid Them,’ breaks down five specific behavioral traps that erode savings, retirement balances, and long-term investment gains.
Research from DALBAR’s 2025 Quantitative Analysis of Investor Behavior found that in 2024, the average equity investor earned just 16.54%, while the S&P 500 returned 25.02%, an 848-basis-point gap that ranked as the second-largest investor shortfall of the past decade.
DALBAR’s 2026 QAIB, released in April, shows the gap narrowed sharply in 2025 to 72 basis points.
Schwab’s five traps target retirement delays and panic selling
The Schwab guide, authored by Austin Jarvis, director of estate planning, trust, and high-net-worth tax at the Schwab Center for Financial Research, identifies five common behaviors that gradually drain portfolios.
The 5 traps Schwab flags
- Postponing retirement savings and missing years of compounding growth
- Failing to build or maintain an adequate emergency fund of three to six months of expenses
- Selling investments during sharp market declines instead of holding a long-term position
- Keeping too much cash on the sidelines and missing out on equity gains
- Over-concentrating a portfolio in a single stock, sector, or asset class
Each involves either a failure to act or an emotional reaction that overrides a rational plan.
The savings-side traps hit early and compound quietly
The first trap involves delaying retirement contributions, as younger workers in their 20s often put off enrolling in a 401(k) or an individual retirement account.
Schwab notes that when the timeline feels distant, and budgets feel tight, the temptation to skip saving altogether grows stronger.
The second trap involves neglecting emergency reserves, leaving households exposed when unexpected expenses force them to borrow. Schwab recommends setting aside three to six months of essential living expenses in a separate account.
Panic selling and sideline cash work against each other
The third and fourth traps on Schwab’s list work together to erode returns in opposite directions: panic selling during downturns and sitting in cash during recoveries.
The Schwab Center for Financial Research has concluded that staying invested over time has generally outperformed attempts to time market swings. In a typical 12-month period, the market has risen about 75.6% of the time, according to the firm’s data.
Naveen Malwal, institutional portfolio manager at Strategic Advisers, suggests elevated valuations shouldn’t necessarily deter investors.
It’s true that US stock valuations such as forward price-earnings ratios are above their long-term average…(Forward price-earnings ratio means current stock price divided by consensus earnings estimates for the next 12 months). And yet, that may not be a reason to avoid the market
“Fiddling with your portfolio right after a major event can potentially create tax drag in a taxable account,” Jarvis wrote in the Schwab guide.
“Some investors want to see a lot of positive news headlines and flashing green lights before they jump into the market,” Malwal said. “In my experience, it is exceedingly rare to find that.”
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Over-concentration is the fifth trap, and behavioral research explains why
The fifth trap on Schwab’s list is overconcentrating a portfolio in a single asset, a risk that is linked to broader behavioral research. Morgan Stanley has studied the psychological forces behind that kind of imbalance for years.
Morgan Stanley’s wealth management division identifies five psychological biases that drive poor investment decisions: herding, anchoring, recency bias, regret aversion, and loss aversion.
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Loss aversion describes how investors tend to feel the pain of a loss more intensely than the satisfaction of an equivalent gain. That imbalance can lead them to take too little risk or exit positions prematurely, the firm noted.
“Even among sophisticated investors, once emotion takes hold, anyone can make irrational decisions,” Morgan Stanley wrote in its Behavioral Finance in the Markets analysis.
Diversification offers a practical hedge against emotional decisions
Schwab’s fix for over-concentration comes down to spreading investments across multiple sectors, industries, and geographic regions, Jarvis recommended in the guide. Investors then revisit that allocation annually to confirm it still aligns with their goals.
The reasoning is practical: when one segment of the market drops, a well-diversified portfolio can absorb the blow because other holdings may respond differently.
Malwal offered a similar perspective, noting that investors with a long-term outlook have frequently benefited from broader exposure to stocks and bonds.
Staying parked in short-term instruments or certificates of deposit may limit growth potential over time, Malwal explained.
Small behavioral fixes now prevent bigger losses later
These traps do not require a market crash to inflict damage. They compound through missed contributions and poorly timed exits over decades, and DALBAR’s shortfall data puts a concrete number on the cost.
Schwab’s guide recommends automating 401(k) contributions to reduce the risk of procrastination and directing part of each paycheck into a separate emergency reserve account through payroll splits.
Malwal added that limiting reactions to market headlines between scheduled reviews can lower the odds of an emotion-driven decision.
Related: Schwab names the No. 1 risk that could derail retirement
