Let’s face it, if you are an investor, you have probably made a mistake somewhere along the line. The mistakes I’m talking about are big mistakes, ones that can really cost you in the future. These kind of mistakes will actually affect the lifestyle you have in retirement, the way you pay for your kids college, or the price of the house you can buy.
- Not starting young enough. When is young enough, you might ask? Well, since we can’t control time, today is the only logical answer to that question. You can’t go back and start when you were 21, so get started now. I promise you that 20 years from now, you will never regret putting that money away for the future. The optimal age to being investing is always as young as possible. Time in the market controls much more of your investment returns than the timing of your investment. If you start saving when you are 20, with all else being equal, you will almost certainly have more money when you retire than if you start saving when you are 30 or 40.
- Trying to time the market. We say it all the time, but let me remind you, you can’t do it. The guy on TV that says he can do it can’t do it. You can’t even guess if the market will be up or down tomorrow without relying on luck. I have never heard a positive story from anyone that started out, “I sold out and went to cash.” Have you? Even if they sell out and the market drops, they never buy back in in time and end up missing most of the recovery. Plus, they miss out on months or years of dividends, and end up behind anyways. Don’t do it!
- Not saving enough of your income. How much is enough, you ask? Well, that depends on what you are trying to achieve. Let’s say you are 40 year old and want to have $1,000,000 when you retire in 25 years. With your risk profile, you are targeting a 7% return for that time. How much do you need to save monthly? $500? $800? $1000? No, you would need to save $1,270 per month to have a million dollars. Any less than that, and you probably won’t hit your target. Any more than that, and you will have a better chance of meeting your goal. Of course, that $1,000,000 will give you about $40,000 per year in retirement income, which may not meet your spending goals. This is why a good goals-based plan is the best way to determine how much to save monthly.
- Being afraid. As asset managers, we know that most people are more afraid of the value of their investments dropping than they should be. Who can blame them? Between the 24 hour news cycle reminding you of all that can go wrong in the world and the fact that we all lived through 2008, fear is a big driver of our decisions these days. Trust me when I say that the news is just trying to get more viewers, clicks, and advertisers, and the simple fact is that to find another drop like 2008, you have to go back almost 80 years to the great depression. These things don’t happen often. 10% corrections happen frequently, but they rarely lead to anything more. Taking more risk can bolster your return, and if your time horizon is more than 5 years, you can probably afford to take more risk than you think. Talk to your financial advisor before making any change like this.
- Thinking of your retirement as a date. Many people go their whole lives thinking about their own retirement as a date on a calendar. After the day they retire, life is totally different. Well, we hope that your retirement is exactly like you planned it out to be, and if you are lucky, it will last more than one day. In fact, your retirement should last you 20 years or more, and your money has to last that long, too. That means that even in retirement, your time horizon for much of your money is more than 5 years, so don’t switch your portfolio to a bunch of bonds yielding 1% and call it a day on the day you retire. Go and see your advisor and figure out a 20 to 30 year plan.