When it comes to planning, and saving for retirement every time a person has struggled it is generally because of one of eight common mistakes.
Freaking out when the market drops – people are human and when they start losing money they get scared, this is a very natural response, but it can also be one of the most dangerous
In two thousand nine the Dow Jones Industrial Average lost half its value. Investors watched as billions and billions of dollars disappeared in a few short months. Is it any surprise that a lot of investors sold at the bottom? They simply couldn’t take the stress of watching their life savings disappear. The market eventually recovered, but sadly a lot of investors didn’t – the lesson here is Buy and Hold is still one of the most successful investment strategies out there.
Trying to buy the “next hot stock” – this is one of the most difficult traps to avoid. You hear about a new business that is making headlines, or someone tells you about a hot stock they are getting rich off of, and you want to get rich too – it’s a natural response. The problem is these “next sure things” more often than not crash taking your savings with them. For every Apple and IBM, there are hundreds of thousands of companies that were the next big thing and they cost their inves- tors everything! Historically, blue chips have averaged 10% a Stick with what works.
Trading too frequently – Trading minute to minute based on rumors and cable news stories isn’t investing it’s speculating. No better than gambling in Las Vegas, and just like Vegas you get the occasional lucky winner, but most gamblers go home broke! Don’t be a gambler – by investing regular amounts at regular intervals in both rising and falling markets in carefully researched bonds, stocks and funds you will maximize your retirement. By investing in both an up and down market, you can take advantage of dollar cost averaging – if dollar cost averaging is a new term for you don’t worry it’s easy to understand, and you’re going to love it! – To give you a simple example let’s say you decide to buy one hundred dollars’ worth of stock XYZ each month for three months, the first month the stock is worth twenty-five dollars, so you buy four shares, the second month the stock is worth twenty dollars, so you buy five shares. The third month the shares are worth thirty-three dollars, so you buy three shares. Giving you a total of twelve shares you bought at twenty-five dol- lars but now the shares are trading at thirty-three dollars that’s a profit of eight dol- lars a share! Not only does dollar cost averaging cut down on the risk of you buying too many shares when shares are overpriced it also automatically uses the method of buy low sell high. Dollar cost averaging will produce great results for your retirement
Not properly diversifying for No one single investment is the right answer. All investments carry a mix of risk and reward, a stock can go down in price, a fund can go down in value, and bonds may be guaranteed, but you are missing out on the higher rate of return from stocks. The only way to maximize your profit and minimize your risk is to have a well balanced investing plan.
Not rebalancing your portfolio regularly – when it comes to your portfolio you will have to make adjustments – not only does the market change but your life is changing too. What was a great investment six months ago may no longer serve your needs.
Borrowing against stocks – when the market is good there is a temptation to try to maximize your profits by borrowing against your stocks to buy even more shares this is a really risky idea. Because when the market turns and markets WILL turn. Your loss will be multiplied.
Miscalculating a particular fund’s tax basis – The tax basis of a fund you own will help determine how much you will own in taxes when you sell. To determine the tax basis, take the price of the fund when you purchased it and sub- tract that from the amount you sold the fund The difference is the amount you will be taxed on. Seems simple enough, right? The problem investors often run into, in the case of a mutual fund is if, like most investors you use any dividends to auto- matically buy more shares, each reinvestment increases your tax basis in the fund.
Delaying Investing… and in my opinion, this is the single biggest and most costly mistake most investors make when it comes to planning their retirement. Waiting to put your money to work will end up costing you a lot! How much could it cost you? Let’s look at two different investors. For the sake of keeping things simple for this example, let’s say both investors put the exact same two thousand dollars every year in the same fund with an annual rate of return of five percent
But Investor A started investing when he was thirty and investor B waited till he was in his forties so by the time investor A reaches sixty and starts withdrawing money he has saved over sixty thousand dollars. While investor B has only saved forty thousand dollars.
That would be bad enough! But let’s not forget the five percent growth. Investor B, who started ten years later at forty, has a total profit from his investment of twenty- six thousand one hundred and thirty-two dollars, that’s not bad.
But with the extra ten years of interest Investor A would have made over seventy- two thousand eight hundred and seventy-eight dollars!
So by delaying ten years investor B cost himself sixty-six thousand seven hundred and forty-six dollar!
And that was just a two thousand dollars a month annual investment. Imagine what might happen with a larger annual investment!