Diligent saving is the single most important thing you can do to improve your retirement prospects. But investing can be a close second, if you go about it the right way. Here are four tips that can help you avoid common investing errors, build a larger nest egg during your career and increase the odds that your savings will be able to support you the rest of your life after you retire.
1. Ignore the market prognosticators. One of the biggest mistakes you can make is taking your cues from the legion of Investing Chatterboxes. You know, that horde of self-appointed investing gurus who populate the internet and the airwaves and jabber away about which direction the market is supposedly headed, which investments you should buy or sell and whatever other usually meaningless factoids flitter through their heads.
The problem is that their nonstop nattering can distract, confuse and mislead. Remember how all the putative experts were spouting gloom and doom about the outlook for stocks when the market got off to a shaky start for the year and was down 11% in early February? Funny how instead of tanking, the market rallied and actually finished the quarter with a slight gain. And when it comes to bonds, the supposed seers have been just as clueless. Far from the Armageddon pundits have been predicting since at least 2011, the broad taxable bond market has gained almost 4% a year the last five years.
That’s not to say that both stocks and bonds won’t take a hit at some point. I’m sure they will; markets don’t go up in straight lines. But if you base your investing decisions on the pronouncements of the chattering class, you’ll spend a lot of time spinning your wheels and making often needless and potentially costly moves that will likely detract rather than add to your portfolio’s performance.
2. Develop a strategy tailored to your needs. Look around and you’ll see people peddling all sorts of supposedly sure-fire investments and investing regimens. Recently, for example, some advisers have touted “The Warren Buffett Portfolio,” essentially a mix of 90% stocks and 10% bonds designed to ensure that you don’t outlive your nest egg in retirement. But just because a the name of a well-known investor or investment firm is attached to a strategy or because a strategy has generated impressive results in the past doesn’t mean you should hop aboard. You need to develop an investing strategy that’s right for your particular situation and goals.
The right way to start: settle on a mix of stocks and bonds that has a reasonable chance of generating the returns you’ll need but is also consistent with the amount of risk you’re willing to take. You can do that by completing a risk tolerance-asset allocation questionnaire like the one Vanguard offers free online. In addition to recommending a stocks-bonds mix based on how long your money will be invested and how much of a hit you can tolerate during a market downturn, this tool will also show you how the recommended portfolio performed on average and in good markets and bad over many decades. To get a sense of whether that portfolio will get you to and through retirement, you can enter that mix of assets, along with other financial information, into T. Rowe Price’s Retirement Income Tool.
3. Focus on fees, not returns. Most people think that market savvy and superior stock or fund-picking skills are the key to investing success. But a recent study from the Boston College Center on Retirement Research found that higher investment fees are the most likely reason 401(k)s, IRAs and similar individual investment accounts underperform professionally managed pension plans.
Fortunately, it’s easy to hold the line on fees. Just stick as much as possible to broadly diversified index funds or ETFs, many of which have annual expenses of less than 0.20% a year, compared to 1% or more for many actively managed funds. If you do decide to invest in actively managed funds, then you should at least screen for ones with lower costs, which you can do with Morningstar’s Fund Screener tool. If you work with a financial adviser, the fees you pay him or her for help also cut into your net return. So you’ll want to make sure you’re not paying more than you should on that front as well.
4. Resist the urge to “improve” your results. Investment advisers are always pushing new and supposedly improved investment vehicles in the name of superior performance or diversification—leveraged ETFs, absolute-return funds, sector or subsector funds, etc. But the last thing you want to do is gussy up your portfolio with gimmicky investments that may not add value but may drive up costs.
Once you’ve created a well-balanced portfolio of low-cost broadly diversified stock and bond funds, you should pretty much leave it alone, except to rebalance periodically (and perhaps to tilt more toward bonds to reduce risk or possibly to buy some guaranteed lifetime income). You may feel tempted to do more. After all, who doesn’t want to improve? But remember: in the investing world, more can often leave you with less. (4/2/16)
Walter Updegrave is the editor of RealDealRetirement.com. If you have a question on retirement or investing that you would like Walter to answer online, send it to him at firstname.lastname@example.org. You can tweet Walter at @RealDealRetire. You can view the original article here.
Disclosure: This information is provided to you as a resource for informational purposes only. It is being presented without consideration of the investment objectives, risk tolerance or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal. This information is not intended to, and should not, form a primary basis for any investment decision that you may make. Always consult your own legal, tax or investment advisor before making any investment/tax/estate/financial planning considerations or decisions.