5 Mistakes to Avoid With Your Investment Portfolio in 2026

Five Investment Mistakes to Avoid in 2026 (Based on Morningstar Discussion)

Key Concepts:

• Small-Cap Value Stocks: Companies with smaller market capitalization and exhibiting value characteristics (low price-to-earnings, price-to-book ratios) – historically underperforming but potentially undervalued.
• Cyclicality: Sensitivity of certain investments (like small-cap and value stocks) to economic cycles.
• Market Capitalization: Total value of a company’s outstanding shares; used to categorize companies by size (small, mid, large).
• Sector Diversification: Spreading investments across different industries to reduce risk.
• Bucket Approach: A retirement portfolio strategy dividing assets into “buckets” based on time horizon and risk tolerance.
• Derisking: Reducing portfolio risk, typically by shifting assets from equities to bonds as retirement approaches.
• Tax-Sheltered Accounts: Retirement accounts (401(k), IRA) offering tax advantages.
• Starting Yields (Fixed Income): The initial yield of a bond, often a good predictor of future returns.
• Fed Watch: Closely monitoring the Federal Reserve’s actions and statements regarding interest rates.

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1. Assuming Stocks are Too Expensive & Missing Out

The conversation begins with the observation that 2025 was another strong year for stocks, but investors should focus on future opportunities rather than past performance. A common mistake is believing all stocks are overpriced and missing potential gains. Christine Benz argues that not all market segments are expensive. Specifically, small-cap and value-oriented companies have underperformed growth stocks in recent years and may be undervalued.

She suggests adding a “small complement” of small and mid-cap value stocks to a broad US market index fund, potentially through an index fund or actively managed fund specializing in undervalued companies. However, she cautions against over-allocation due to the cyclicality and market sensitivity inherent in these types of stocks. The goal is to augment a broad US market exposure that is heavily weighted towards large, AI-related technology companies.

2. Ignoring Non-US Stocks

Benz highlights that she correctly predicted the outperformance of non-US stocks in 2025, after years of advocating for increased international exposure. Despite this recent success, she maintains that non-US stocks remain relatively cheap compared to US stocks.

Currently, the global market capitalization is approximately 2/3 US and 1/3 non-US, yet most US investors hold significantly less than 1/3 of their equity portfolios in non-US stocks. She recommends “topping up” non-US exposure to achieve better sector diversification, gaining access to sectors underrepresented in the US market, such as financials, basic materials, and industrials. Potential benefits include global diversification, a possible weakening US dollar, and exposure to different economic cycles. While non-US stocks are less undervalued than a year ago, ignoring them remains a potential mistake.

3. Failing to Derisk Portfolios Near Retirement

For investors approaching retirement, a critical mistake is failing to reduce risk in their portfolios. Benz observes that many older adults are reluctant to sell equities due to the strong performance of US stocks over the past decade (approximately 15% annualized gains). However, she emphasizes the importance of derisking a portion of the portfolio, specifically the amount needed to cover planned expenditures in the first 5-10 years of retirement.

She advocates for the bucket approach to retirement portfolio construction, suggesting holding 7-10 years of planned expenses in a combination of cash and high-quality bonds. Derisking should ideally occur within tax-sheltered accounts to avoid tax implications. Alternatively, new contributions can be directed towards safer holdings, incrementally shifting the portfolio allocation.

4. Overly Focusing on Macroeconomic Factors in Bond Portfolio Positioning

Benz advises against excessive attention to macroeconomic factors (like Federal Reserve policy and interest rates – “Fed Watch”) when constructing a bond portfolio. Instead, investors should focus on their individual spending horizon and strategically allocate fixed income holdings accordingly.

She emphasizes the importance of high-quality fixed income as an antidote to equities. Allocation recommendations based on spending horizon:

• < 2 years: Cash
• 3-5 years: Short-term bonds (lower yield, more interest rate stability)
• 5-10 years: High-quality intermediate-term bonds
• > 10 years: Equity allocation

Once established, the portfolio should be maintained long-term, avoiding frequent adjustments based on market predictions.

5. Expecting Past Stock Market Returns to Continue

Benz cautions against assuming that the exceptional returns experienced by US stocks over the past decade (10-15% annualized) will be repeatable. Using this figure for future planning can lead to unrealistic expectations and potential shortfalls.

Instead, she recommends anchoring return expectations to long-term historical returns, potentially even slightly below those figures to be conservative. For fixed income, she suggests using starting yields as a benchmark for expected returns. Currently, a 10-year Treasury yield of around 4% provides a reasonable expectation. She stresses the importance of tempering expectations and avoiding over-optimism.

Notable Quote:

“Don’t use that [10-15% annualized return]… it’ll make you feel good in terms of like, oh, we I don’t have to save that much. But, uh, the downside is that you could come up short if the market doesn’t cooperate with those aspirations.” – Christine Benz

Logical Connections:

The discussion flows logically from identifying potential mistakes stemming from recent market performance (high stock returns, non-US stock outperformance) to addressing portfolio adjustments needed for different life stages (approaching retirement) and investment strategies (bond portfolio construction). Each point builds upon the previous one, emphasizing the importance of a long-term, strategic approach to investing.

Conclusion:

The conversation with Christine Benz provides actionable insights for investors navigating the market in 2026. The key takeaways are to avoid complacency based on recent gains, diversify internationally, proactively manage risk as retirement approaches, focus on strategic asset allocation rather than market timing, and maintain realistic return expectations. By avoiding these five common mistakes, investors can improve their chances of achieving long-term financial success.