Have you started thinking about retirement and begun to worry about what life in retirement will be like if you don’t build a whopping big nest egg? Experts estimate a comfortable retirement requires $1.04 million dollars saved up. Factor in even a few years of high inflation and a couple of decades of average inflation, and that million could easily quadruple! That’s a tall order, but if you’re smart about it and avoid major investing mistakes, it’s very doable. In this article, we’ll detail several of the worst investing mistakes that could derail your retirement dreams and how to overcome them to achieve your savings goals.
While many rail against taxation as an unjust seizure of our money, I firmly hold that taxes (at reasonable levels) are a necessary evil. That’s how we fund things like our national defense, federal and state responses to emergencies, the highway system, etc. Of course, there’s plenty of waste, and many cases where lawmakers stuff unnecessary “earmarks,” also known as “pork,” into legislation. However, that’s a small part of the federal budget.
Regardless of whether you agree with me or not, you have to pay your taxes if you want to avoid going to jail (e.g., mobster Al Capone famously evaded conviction on countless cases of murder and mayhem, but was ultimately undone on tax evasion charges). While tax evasion is illegal and will drop you in hot water, tax avoidance is perfectly legal. The International Tax Blog offers two relevant quotes from rulings by Judge Learned Hand.
“Any one may so arrange his affairs that his taxes shall be as low as possible; he is not bound to choose that pattern which will best pay the Treasury; there is not even a patriotic duty to increase one’s taxes.” Gregory v. Helvering, 69 F.2d 809, 810 (2d Cir. 1934)
“Over and over again courts have said that there is nothing sinister in so arranging one’s affairs as to keep taxes as low as possible. Everybody does so, rich or poor; and all do right, for nobody owes any public duty to pay more than the law demands: taxes are enforced exactions, not voluntary contributions. To demand more in the name of morals is mere cant.” Commissioner v. Newman, 159 F.2d 848, 851 (2d Cir. 1947) – dissenting opinion
There are multiple tax-advantaged ways of saving and investing for retirement, and if you don’t take advantage, your retirement will be far less comfortable. These include Roth IRAs and Roth 401(k) plans, where you contribute after-tax money, but both the contributions and every penny they make are all tax-free. They also include traditional IRAs, SEP IRAs, SIMPLE plans, and 401(k) plans, where you contribute pre-tax dollars and don’t have to pay any taxes until you withdraw money, and even then, only on those withdrawals. Best of the lot are Health Savings Accounts (HSAs), where you contribute pre-tax dollars, they grow tax-free, and withdrawals are tax-free as well, so long as they’re used to pay for medical expenses. Given how the average retired couple can expect to pay over $300,000 in medical expenses, it’s a good bet that HSA money can all be spent tax-free.
Possibly the greatest investor of all time, Warren Buffet credits Graham’s teachings for his incredible success. Among other things, Buffet quoted Ben Graham as having said, “In the short run, the market is a voting machine but in the long run it is a weighing machine.” Since it’s impossible to know everything about an investment (short of illegal insider trading), timing the market requires you to guess correctly the market’s lows (to buy in), and its highs (to sell).
According to a Business Insider article, Fidelity Investments conducted a study to find out what their investors with the best investing results had in common. The result, according to BI, was that they were the ones who had forgotten they had a Fidelity account! What does forgetting you have an account mean? It means you stop trading. This means that just holding for the long haul resulted in better outcomes than trying to optimize your results by timing the market.
Many claim (with some basis, according to research) that beating the market over the long term is impossible. I disagree. In my opinion, backed with data from many of the funds I invest in, it’s not impossible, merely difficult. Either way, what matters is how you invest to get the best long-term results. If you bet the farm on high-risk strategies, you may get very lucky and go from a few thousand dollars to a few million. However, doing that makes you a speculator (= gambler) rather than an investor, and you’re far more likely to lose it all. Investing is about achieving your personal financial goals, not beating the market. Would you rather get great returns but fail to achieve your goals (e.g., because you invested too little, too late), or achieve your goals with mediocre returns (because you invested early, often, and consistently)? In short, if you consistently follow a plausible system for picking good solid investments, you should do well over the long haul. If you keep taking high-risk bets in the hope of knocking it out of the park, you’re setting yourself up for big losses.
When I sold my first home and bought my next one, I ended up with a nice chunk of change beyond what I needed for the new purchase. I decided to split it between my 403(b) retirement plan and a taxable account with TD Ameritrade. The money in the latter I split five ways between stocks I thought would do well. One of those was Bank of America, which at the time paid a very high dividend. For a while, the stock climbed slowly. Then, it started falling, and continued falling until it was worth pennies on the dollar. My other picks did better, some doing quite well. But overall, the S&P 500 left me behind, as did my mutual fund investments. The lesson I learned from that was that I don’t have the expertise and experience to beat the pros, nor the time to gain such expertise and experience, nor the analyst support they all enjoy. Do you?
Holding on to a losing investment until you break even can burn you badly. Some stocks never come back. Buy and hold can work out well for some stocks, but for others, you’re just throwing good money after bad. Even companies that don’t go bust may take a very long time to recover their stock price (if they ever do). That’s why you should consider whether there are other investments that offer better prospects than the ones you’re holding that have dropped. Of course, running for the exits after you lost a big chunk of your investment and buying a new market darling is a “great” way to sell low and buy high – not the optimal investing strategy. This is why you have to craft your investment system when you’re not stressed by losses, and then stick with it through the inevitable market gyrations.
Doing due diligence when choosing investments is crucial. But there are no extra points for effort in investing. How hard you worked on your analysis matters far less than how good a job you did. If you picked an investment due to fundamentals (or technical analysis), and market, industry, or specific investment conditions have changed, be ready to pivot and move your funds to what is now a better investment. A great way of expressing it is that investing requires you to have strong opinions, weakly held. Strong enough to act on, but weakly enough held that you don’t hesitate to act appropriately on new information.
Personal finance, as I often point out, is exactly that – personal. What’s right for me could be completely wrong for you. However, as the well-known quip goes, “The race isn’t always to the swift, nor the battle to the bold. But that’s the way to bet.” You may choose to go against any or all of the above recommendations, and may even be better off for it. However, in my experience, the odds will be against you.
Douglas Finley, MS, CFP, AEP, CDFA founded Finley Wealth Advisors in February of 2006, as a Fiduciary Fee-Only Registered Investment Advisor, with the goal of creating a firm that eliminated the conflicts of interest inherent in the financial planner – advisor/client relationship. The firm specializes in wealth management for the middle-class millionaire.
Here’s How to Shock-Proof Your Retirement Plan
Country Debt and Stock Returns
Does Your Bond Portfolio Need a Passport?
Concern over Market Valuations
What Happens When You Fail at Market Timing
TIPS Can Help Investors When Inflation Spikes
Understand the Lifetime Income Projections Coming to Your 401(k) Statement
Is Your Portfolio Underperforming … Compared to What?