Don't Fall Into Common Investment Traps

August 19, 2019
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As we me move through life, there are different stages to our financial reality.  In each stage there are important steps to take to ensure success.  Today, we will explore some of the common mistakes in each of the stages and how you can avoid them.

The first stage we call The Age of Consumption.  This is usually your twenties and thirties, when you are starting your adult life.  After years of living under their parents’ roof, many young people are eager to get out on their own and buy some of the nicer things in life, like cars and homes.  It is easy to pile up big payments.  Sometimes these big payments will get in the way of saving, especially for retirement, because retirement seems so far away.  This can be damaging because the money you save in the early years of saving will have longer to grow, and that can make a significant difference down the road.

Another mistake young people make is not taking advantage of tax deferred retirement savings, like 401(k)s.  According to the US Department of Labor, 30% of eligible participants don’t put any money into their plan.  If your employer matches your contributions, you are giving up free money if you don’t participate.  Plus, saving through your 401(k) is easy because it is simply deducted from your paycheck – before your tax withholding is calculated, in most cases.

At all stages of life it may make sense to use an asset allocation plan, and early on, some people invest too conservatively.  Through, stocks have averaged 10% since 1926, while bonds and cash have averaged 5.5% and 2.9%, respectively, according to Ibbotson.

We refer to the next stage as The Age of Conflicting Demands.  This is the period when children are older and often going off to college, demanding a large share of financial resources.  It is also a time when people sometimes change jobs.  One mistake to avoid is cashing out your retirement savings when you do so.  For one thing, the distribution will likely be taxable, and may also be subject to a penalty for early withdrawal.  Instead, consider moving it to your new employer’s plan, leaving it in the former employer’s plan, or rolling it over to an IRA.  These options will likely preserve your tax deferral. 

By this time, you may have learned some things about investing and may have acquired some experience.  It can be tempting to try to “time the market” – to move out of stocks based on what you think the market will do.  This very difficult for even professional investors to do.  Usually, sticking to you plan is the best course of action.

The last preretirement stage we call The Final Countdown.  This is the last ten years or so before retirement.  As that date draws nearer, some people may panic because they feel they don’t have enough saved up.  When this happens, it may be tempting to take on more risk than you should to try to “make up for lost time.”  As your retirement date nears, you have less time to make up for volatility in the market. Some people make the opposite mistake as well, switching everything to short-term, low-risk, low-return investments.

 Instead of chasing the highest returns with the most aggressive investments, or attempting to avoid any loss, use a sound asset allocation plan and a diversified portfolio. 

There are many pitfalls to planning your retirement, but with a little work you may be able to avoid many of them.

To hear the podcast of the Smart Money Management radio show on this topic, or others, go to our website at alderferbergen.com.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. 

Asset allocation does not ensure a profit of protect against loss.

All investing involves risk including loss of principal. No strategy assures success or protects against loss. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.

Securities and Advisory services offered through LPL Financial, a registered investment advisor.  Member FINRA/SIPC.