The No. 1 Mistake Retail Investors Keep Making, According to This Wall Street Insider
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With markets swinging on headlines and hype, it’s easy for retail investors to get caught up in the wrong moves. Dan Nathan has seen this story play out over nearly 30 years in the markets — from the dot-com crash to the 2021 meme stock bubble — and knows exactly why smart people keep making the same costly mistakes.
As the founder of RiskReversal Advisors, a CNBC contributor and a veteran trader who spent years at hedge funds and Merrill Lynch, Nathan has a front-row seat to investor behavior. His diagnosis of the biggest mistake plaguing retail investors right now might surprise you — and his solution could save your portfolio.
Why Even Smart Investors Chase the Wrong Stocks
“The thing I’ve noticed over the last 30 years in the market is that there’s continually this move to chase big themes,” Nathan told GOBankingRates. Whether it was dot-com stocks in the late ’90s, cloud computing 15 years ago or AI stocks today, the pattern remains the same.
The problem isn’t recognizing these trends — it’s how investors approach them. Nathan witnessed this firsthand during the dot-com era: “It just looked like this thing was never going to end. There was always a new IPO, whether it was Amazon or Yahoo or AOL or eBay. And it just kept on coming.”
The mistake? Thinking every stock tied to a hot theme is a winner.
“A lot of folks just said, ‘This is a way to make a lot of money,’ because they saw other people doing it,” Nathan said. “But at some point, all of that comes to an end.”
The Quality vs. Hype Trap That Costs Investors Millions
Nathan draws an important distinction that most retail investors miss: the difference between high-quality investments that perform over time and low-quality investments that might work briefly but carry greater risk.
Take the current AI boom. Companies like Microsoft, Nvidia, Google and Amazon are spending billions to build out AI infrastructure. These are established businesses with strong fundamentals that will likely survive any AI bubble burst.
“One thing I’m fairly certain of is those companies are going to be around even if this theme has a bit of a downturn,” Nathan said. “They’re going to be around in three years or five years or 10 years.”
But then there are the AI meme stocks — small companies issuing splashy press releases about AI plans but lacking real business models or proven leadership.
“There’s a narrative around it and people on social media like it and people are making money on it. So why not chase it?” Nathan explained. That kind of thinking, he warned, is dangerous.
The same logic applies to cryptocurrency. Bitcoin and Ethereum might have legitimate use cases, but meme coins? “If you’re late to the game, you’re going to be basically paying at the top and selling at the bottom.”
The Emotional Trading Cycle That Never Changes
Nathan points to a recurring pattern he’s observed through every major market cycle: “Some investors reach too far when things are really good, and then they go the opposite way and get a little too negative when things are really bad.”
This emotional whiplash can destroy wealth. During bull markets, investors chase increasingly speculative plays. During downturns, they panic-sell quality investments at the worst possible time.
The solution requires what Nathan calls “having more of an even keel — not always chasing the hottest things in the market and not always being overly pessimistic when things feel really bad.”
How To Course-Correct Without Making Things Worse
If you’ve already made a mistake — bought at the top of a meme stock or panic-sold during a dip — Nathan’s advice might be counterintuitive.
“The hardest thing for a lot of investors is learning how to lock in a loss — but it’s what protects you from catastrophic damage,” he explained.
If you own 100 shares of a stock that’s down 10% while the broader market is rising, consider selling 25 shares. Yes, you’re locking in a loss, but you’re also limiting future downside.
“If the stock were to continue to go much lower, at least you’ve moved your feet a little bit,” Nathan said. “The more that happens to you, the more you move your feet, the less likely you are to take really catastrophic losses.”
The Research Framework That Actually Works
Nathan emphasizes that most retail investors skip a critical step: doing the homework.
To invest smarter, Nathan suggests:
- Understand what companies actually do and who their competitors are.
- Check if they’re profitable and have sustainable business models.
- Monitor how your stock performs relative to the market — if the S&P 500 is down 10% and your stock is down 30%, that’s a red flag.
- Be clear about your time horizon — are you investing for retirement or trading for short-term gains?
For long-term investors, temporary setbacks in quality companies matter less than for short-term traders chasing momentum.
Why Time Horizon Changes Everything
Nathan stresses that your investment approach should match your timeline. If you’re investing in a 401(k) for retirement decades away, short-term volatility in quality companies shouldn’t trigger panic selling.
“If you’re thinking long-term, then you really have to kind of think about, okay, how is this company positioned? How is the macro environment affecting this company right now?” Nathan said.
But even long-term investors should be wary of poor performance. A quality company may dip with the market, but if it lags by a significant margin, something may be wrong.
The Veteran Trader’s Simple Rules for Retail Success
After nearly three decades of market experience, Nathan’s advice for retail investors boils down to several key principles:
- Focus on quality over hype — choose established companies with real competitive advantages over speculative plays.
- Don’t chase every hot theme — recognize that profitable trends often become unprofitable bubbles.
- Learn to take small losses before they become catastrophic.
- Match your strategy to your timeline — long-term retirement investing looks different than short-term trading.
- Do your research — understand what you own and why.
Why This Advice Matters More Than Ever
With social media amplifying investment trends and commission-free apps making it easier to trade on emotion, Nathan’s warnings feel particularly urgent. The democratization of investing has created more opportunities — and more ways to lose money quickly.
“Nobody’s going to be perfect at this,” he said. “Some of the things I’m talking about are from a guy who’s made all the mistakes in the world when it comes to investing.”
But learning from those mistakes — and from market veterans who’ve seen multiple boom-bust cycles — can help everyday investors avoid the costly errors that lead to big losses.
The Bottom Line for Individual Investors
The biggest mistake retail investors make isn’t picking the wrong stock — it’s approaching the market with the wrong mindset. Chasing trends without understanding fundamentals, letting emotions drive trades, and failing to cut losses all stem from treating investing like gambling instead of a path to long-term wealth.
Nathan’s decades of experience distill into one insight: slow and steady wins the race. That might not be as exciting as chasing the next meme stock or cryptocurrency, but it’s how wealth is actually built.
“You have to be a little bit more discerning than just chasing every stock or every theme that seems to be working,” he said. That discernment — the ability to separate quality from hype — might be the most valuable skill any investor can develop.
This article is part of GOBankingRates’ Top 100 Money Experts series, where we spotlight expert answers to the biggest financial questions Americans are asking. Have a question of your own? Share it on our hub — and you’ll be entered for a chance to win $500.
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