When it comes to investing your hard earned dollars, whether you’re a do-it-yourselfer or utilize the services of a financial advisor, there are probably some things that are just not quite right with your portfolio. Here are 7 investing mistakes that most people make that can hurt your long term performance and may cause that retirement to not be exactly what you had in mind.
Not having the right asset allocation
Studies show that your asset allocation, or how much of your portfolio is devoted to stocks and how much is in bonds, is a greater factor in the return your portfolio will earn over time than the individual investments you make. So getting that right is really important. But it changes over time. A 25 year old with decades until retirement might be able to afford to take on more risk and devote 80-90% of her portfolio to stocks. But an empty-nester couple at age 60 doesn’t have time to recover from big losses and might not be able to hold more than 50-60% in stocks. Your stage in life, your goals, and your tolerance for risk are factors to determine just how aggressive your portfolio should be red rock entertainment.
Trying to time the market
After the asset allocation is determined, you should stick with it until some factor in your life changes. As discussed above, maybe you’re 10 years older and closer to retirement and your portfolio needs to be more conservative. Then it’s okay to change the allocation. Hearing at a cocktail party that stocks are overvalued and you should run for the hills is not a reason to abandon a long term plan. Moving in and out of the market at the right time is not something that anyone has figured out. What makes you think you can do it? Even if you do guess right and exit stocks right before a big fall, how will you know when it’s safe to get back in? Can you do it consistently over your investing lifetime? Not likely! Don’t try it.
Not rebalancing regularly
Both the stock market and the bond market fluctuate daily. So the exact asset allocation you set on Tuesday won’t still be in place by Friday. That’s okay, because different asset classes move in different directions at different times. One year, large cap U.S. stocks might be the top performer, the next year it might be real estate, and the year after that it might be international bonds. Because you don’t know which asset class is going to be “the hot one” this year, it is best to rebalance your portfolio regularly, typically once a year, to get it back to your desired allocation. This rebalancing will cause you to lighten up on some of your best performing investments and add to those that have lagged. Over the long term, this will have you ready for next year’s best performer.
Trading too much
Trying to find the “next big thing” is everyone’s dream. But it’s just that, a dream. When it doesn’t pan out the way you expect, you sell and move on to another one. But buying and selling frequently increases your investing costs by racking up more in commissions. If the trading is done in a taxable account, it also can raise your tax bill and complicate your tax return. Again, having a long term plan entails sticking with it through thick and thin. If you can’t resist the urge to speculate, do it with a very small portion of your portfolio, say 10% at the most. Do it in a tax-deferred account like your IRA where short-term capital gains aren’t an issue.
Not using index funds or ETFs
Investment professionals make these same mistakes too. Your mutual fund manager likely trades too much, tries to time the market on occasion, and charges you too much in fees. Add to this that most actively managed mutual funds fail to meet or beat their benchmark over the long term. Index mutual funds and ETFs are designed to track a particular index. Invest in them and you will earn the same return as that index (less the small expense ratio). This puts you ahead of most actively managed funds and is one more feather in your cap in the long term accumulation of your desired retirement nest egg.
Paying too much in fees
Over time, the fees you pay in your portfolio really add up. So whether you shell out 1.25% in annual expenses to your mutual fund, pay a sales load or other commission to your broker, or pony up 1% of your assets under management each year to your investment adviser, there are cheaper alternatives. Most index funds and ETFs, as mentioned above, have expense ratios of 0.50% or less. That can equate to almost an extra percentage point of return added to your bottom line each year. Compounded, that can add up to tens of thousands of dollars added to your portfolio over an investing lifetime.
Watching financial news on television
The so-called investment gurus that greet us each day on cable television are a form of reality TV. Reality TV is entertainment. It is not the place you go to get lifelong investment advice. It is not uncommon to hear “Buy Company XYZ” one week, “Quick, Sell XYZ” the next week, and be told to turn around and buy it again the next week. Following this advice entails making several of the mistakes on this list – trading too much, timing the market, racking up commissions… If you need a fix of reality TV, that’s fine, watch something for entertainment. But don’t confuse that for proper investment advice and mix your entertainment with your hard earned retirement nest egg.