investing for retirement

Investment for retirement: 13 mistakes that will cost you money

Having enough money to enjoy retirement, whenever it arrives, is something we all want. 

However, no matter how much you manage to save, losing money is painful, especially when as time goes on, we stand fewer chances of making it back.

And the more we make mistakes with our money, the harder it becomes.

Here are 13 common blunders people make when making an investment for retirement. Hopefully, you can avoid making the same errors.   

1. Not taking enough risk 

It’s common to focus on not losing money as you approach retirement. 

On the face of it, this looks fairly sensible.

But…

When you’re focused on this as the major challenge to investment for retirement, it’s easy to forget about inflation, outliving your money and any credit risk.

Often the ‘safer’ types of investment retirement investors like to purchase, such as bonds, also offer really low rates of return.

Safer assets like these definitely have a place in your portfolio because it means you’re less likely to lose money. But, it can also mean that the returns you get don’t keep up with inflation.

Consequently, you have less money to get what you need as costs go up.

And, you also have less time to increase your income.

Not a great situation.

The solution here is to invest in so-called riskier assets, such as stocks. The right choice of stocks can produce higher returns and be less volatile in the short to medium term.

This means more money for you in your retirement investment portfolio.

2. Investing in things you don’t understand 

If you’ve ever seen the film The Big Short, you’ll have an insight into the complexities that caused the 2008 financial crash.

Sometimes buying and selling monetary assets is even too complex for professionals. The consequences of this can be devastating.

It’s amazing how many people are talked into putting their hard-earned money into assets they don’t fully understand. This is so risky it shouldn’t even need to be said.

But, sadly it’s really common.

Investing should never be scary. If you don’t fully understand the securities you’re purchasing with your money, then don’t buy them!

This applies as much to choices of stocks and bonds as it does to derivatives and other exotic financial complexities.

Keep it simple stupid, ignore sale pitches, make sure you fully understand what you’re buying to reduce your risk of any losses.

3. Going for Gold 

There’s a common theme with investment advice that gold, and sometimes other commodities, can be used as a hedge against inflation. 

Gold especially is considered to be a ‘safe’ asset, far safer than stocks at any rate because people view it as a store of wealth.

Consequently, many people like to add it to their investment portfolio in case of a stock market downturn.

However, gold is a commodity, like grain, oil or coffee.

Its the price is completely dependent on the balance between its supply and demand. This means directly buying gold is actually highly speculative! 

In addition, you can’t earn any income from it. And if you buy gold directly, you’ll also incur insurance and storage costs.

That said, in recent history gold has outpaced inflation, so it’s not optimal to ignore it entirely.

By keeping a small amount of your retirement portfolio (2-5%) invested in a low-cost fund specialising in precious metals companies, you can reap the rewards of some spectacular returns. And you can do this while limiting your exposure to poor ones and avoiding any direct costs associated with the direct purchase of gold.   

4. Chucking too much money into real estate as an investment for retirement

Real estate is a popular choice for investment portfolios. 

It’s an asset many people feel they understand. After all, so many of us have mortgages or pay rent for our own living accommodation, we think we’re familiar with housing markets. 

In addition, many real estate deals will offer high percentage returns that are very attractive.

However, buildings depreciate in value over time, buying and selling costs can be high and looking after real estate assets is management intensive, even if it’s contracted out to an agency. 

There’s also the financial inconvenience of having to put money into a property if the property market is lacklustre and finding tenants is difficult.

Despite its familiarity, directly investing in real estate can leave you with little control over your investment.

One way of investing in real estate that alleviates some of these factors is to buy into a real estate investment trust (REIT). These are a type of publicly traded equity investment in real estate.

The trust itself will hire a professional property manager and investors gain exposure to a diversified portfolio of real estate. The REIT can be sold at any time on the market and due to their unique tax status, much of the income has to be dispersed as dividends to investors.

This makes the investment a great way to invest in real estate if you want easy ownership, greater liquidity and opportunity for broader diversification not available to you by investing in real estate directly.

It also gives you the option to change your portfolio relatively quickly to suit any changing circumstances, unlike a direct investment.

5. Behaving like a day trader

Day trading is easy.

You buy financial securities like stocks and bonds when they’re cheap and you sell them when the market is booming and they become overpriced.

Simples!

Or is it…?

How do you know when the markets for your securities are going up and down?

The answer is there’s no way you can. But that doesn’t stop speculators from trying to time the market.

However, improving your portfolio returns in this way is almost impossible for most people.

Rebalancing a portfolio is a much better way to make your investment for retirement work for you.

6. Taking politicians seriously

A committed Communist and follower of Karl Marx may denounce deriving a passive income from owning the means of production.

In other words, a Communist may not believe in receiving dividends or interest as part of their portfolio because they haven’t gone out and directly earned it.

That’s all fine in theory but taken at face value nowadays, it means a devoted Communist wouldn’t even have a retirement investment portfolio unless it consisted of savings set aside from working days.

It’s a completely unrealistic way of surviving in today’s world but it doesn’t stop people – politicians especially – from encouraging unrealistic behaviour. 

This is an extreme example of course but analysing the world as it is and not as you want it to be should be the basis on which we base any investing decisions in our retirement portfolios.

I’m not suggesting that we shouldn’t take into account the impact of ideologies and political party ideas on the financial markets and wider economy. Far from it.

I’m suggesting that’s it’s not a good idea to follow them blindly without putting them into a wider up-to-date context on which to base any financial decisions. 

Your own research is vital to the success of your portfolio. And sometimes what appears to be nice politics is very bad for your retirement portfolio. 

It pays dividends to not let your political beliefs get in the way of your money management.  

7. Forgetting the fundamental market rule

There are always theories circulating about what factors drive the price movements of stocks, bonds, commodities etc

But, the one most important factor is often discussed much less.

It’s the balance between supply and demand, a fundamental market rule.

This is the key factor that drives the prices of financial securities and it’s essential to understanding price movements.

When supply is low and demand is high, prices are high too. But conversely, when supply is high and demand is low, prices are also low.

For example, the bull markets of the late 1990s was a consequence of the high demand for stocks. The supply of the stocks was stable and so stock prices rose.

But, then many new stocks came onto the market due to an increase in initial purchase offerings (IPOs) available. 

There were now too many stocks available to investors and so prices dropped.

Then came many mergers and acquisitions which reduced the amount of stocks available and share rices began rising again.

Effectively, anything a company does that affects the number of its shares for sale will impact its stock price – share buybacks raise stock prices and share issues can lower them.

Understanding this dynamic can really help you with investing decisions.

8. Running away from the agony of loss

When the stock prices of your investments have plummeted, it’s so tempting to give in to your emotions and just sell your shares.

However, the worst time to sell your shares is right after a downwards market correction, or a drop.

Not only do you then realise your losses but it’s highly likely the stock market will go back up again at some point. After all, the average returns of the FTSE 100, S&P500 and similar indicies are all very positive over time.

Indeed, the only certainty about the stock market is it fluctuates continually!

But, more importantly than this, you’ll lose your focus on your investing goals. And if you hold dividend stocks, you’ll lose that income too.

Keeping hold of your stocks through downturns is emotionally hard. But it’s only by holding on will you realise the returns that can be made from markets adjusting in the opposite direction.

It’s a great idea to have a plan in place to ovoid over-reacting in the case of a bear market.

9. Unwittingly using Ponzi schemes

A Ponzi scheme is an investment that pays current investors with funds raised from new investors.

Such schemes often promise high returns with little risk. This is always a red flag when investing because risk and return always go together – you need higher incentive to take higher risks of losing money.

However, in Ponzi schemes, the money is not often invested at all but used to pay earlier investors, so the schemes need constant cash flows to keep them in business.

There are two issues at play here.

The first is a lack of due diligence on the part of the investor. Doing your own thorough research, understanding what you are investing in and how it works will reduce the risk of throwing money into ponzi schemes.

The second issue is putting all blind trust in your provider, no matter how reputable. Assume nothing, question everything and draw your own conclusions.  

10. Putting too much trust in your employer

There are a lot company pension schemes out there that employers promise to contribute to. 

This is great. Grab them when you can! 

If an employer offers these schemes, and you don’t use them, you’re effectively working for less money because your employee has already allocated the money for you.

However, be cautious when it comes to employers paying into these schemes with their own stock, or when using employee stock purchase schemes.

This is because the stock is subject to market prices whether or not its provider by your employer or you buy it directly.

Consequently, if your firm goes bust or prices drop, so will a large chunk of your pension.

Avoid this by thinking of your employer’s pension, with its stock, as part of your diversified portfolio, and not an entity in its own right, and include your employer’s stock in your asset allocation ratios.

11. Thinking investment for retirement means less tax

Depending on your status, some investment returns will be taxable, such as taxable mutual funds and bonds. 

One common practice is to put these investments into tax-deferred accounts which can be great advice.

However, be careful.

If you think taxes are going to be higher in the future, you have to ask yourself why you’re deferring paying them?

It’s a common assumption to think you’ll be in a lower tax bracket when you retire. But, if a large proportion of your money is in a tax-deferred account, the tax will still be due…

It could make more sense to move your money into tax-free accounts instead and pay any tax due now. 

But, it will depend on your personal circumstances. Asking a financial advisor is a great idea if you’re unsure.    

12. Too much diversification (diworsification)

You’ll see professional financial advisors almost always telling clients to make sure their portfolios are diversified. 

This is because it’s great advice and when done properly it reduces your risk of losing money.

A well-diversified portfolio will have a mix of assets, customised to an investor’s overall investment objectives and risk tolerance.

However, it is possible to diversify too much.

Diworsification happens when you buy and sell assets with similar investment risk. This is because every sale is revenue for the seller and cost for you and it doesn’t provide your portfolio with any net benefit.

For example, owning more than one mutual fund of the same style, using too many multi-manager products and holding too many individual stocks are all examples of an over-diversified portfolio.

Too many investments can be confusing, increase your costs and your due diligence workload and is inefficient, leading to lower returns. 

13. Following the crowd

One of the worst mistakes you can make in investing is doing what everyone else is doing purely because everyone else is doing it.

Often, this is what happens in a bear market. Investors sell shares in great companies because they know the market is plummeting – many others are selling their shares and want to rid themselves of falling share prices.

But it’s here that great opportunities are made!

In a bear market, you can pick up the stock of solid companies selling at sale prices. Eventually, the stock market realises its mistakes and you’re quids in.

Another example is with bonds. It’s common advice when determining asset allocation for an investment for retirement portfolio to subtract your age from 100. The resulting figure gives the percentage of your portfolio you allocate to bonds – the older you are, the higher your percentage of bonds.

But, in an area of low bond yields, where’s the income going to come from for you to live on in retirement? Or perhaps you already have enough income and want to pass your shares on to your children?

The principle of risk reduction in a portfolio itself is a valid one but it can be accomplished in other ways that also provide you with a means to live.

Thinking for yourself is extremely underrated.  

Conclusion

Making an investment for retirement can be an anxious time. However, having enough money to enjoy yourself is definitely an achievable goal.

But to do so, you need to make every pound, penny, dollar and cent count.

The best way to achieve this is to prevent yourself from losing money.

The next time you assess your portfolio, compare it with the above list, keep an open mind and ask yourself if you’re making any of the above blunders.

If you are, you now know how to correct it. When you reach your investment goals, you’ll be glad that you did!

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