As an investor, how can you avoid making mistakes? It’s not always easy, because investing can be full of potential pitfalls. But if you know what the most common mistakes are at different stages of an investor’s life, you may have a better chance of avoiding these costly errors.
Let’s take a look at some investment mistakes you’ll want to avoid when you’re young, when you’re in mid-career, when you’re nearing retirement and when you’ve just retired.
When you’re young …
Mistake: Investing too conservatively (or not at all) — If you’re just entering the working world, you may not have a lot of money with which to invest. But don’t wait until your income grows; putting away even a small amount each month can prove quite helpful. Additionally, don’t make the mistake of investing primarily in short-term vehicles that may preserve your principal but offer little in the way of growth potential. Instead, position your portfolio for growth. Of course, stock prices will always fluctuate, but you potentially have decades to overcome these short-term declines. Since this money is for retirement, your focus should be on the long term — and it’s impossible to reach long-term goals with short-term, highly conservative investments.
When you’re in mid-career …
Mistake: Putting insufficient funds into your retirement accounts — At this stage of your life, your earning power may well have increased substantially. As a result, you should have more money available to invest for the future; specifically, you may now be able to “max out” on your IRA and still boost your contributions to your employer-sponsored retirement plan, such as your 401(k), 403(b) or 457(b). These retirement accounts offer tax advantages that you may not receive in ordinary savings and investment accounts. Try to put more money into these retirement accounts every time your salary goes up.
When you’re nearing retirement …
Mistake: Not having balance in your investment portfolio — When they’re within just a few years of retirement, some people may go to extremes, either investing too aggressively to try to make up for lost time or too conservatively in an attempt to avoid potential declines. Both these strategies could be risky. So as you near retirement, seek to balance your portfolio. This could mean shifting some of your investment dollars into fixed-income vehicles to provide for your current income needs while still owning stocks that provide the growth potential to help keep up with inflation in your retirement years.
When you’ve just retired …
Mistake: Failing to determine an appropriate withdrawal rate — Upon reaching retirement, you will need to carefully manage the money you’ve accumulated in your IRA, 401(k) and all other investment accounts. Obviously, your chief concern is outliving your money, so you’ll need to determine how much you can withdraw each year. To arrive at this figure, take into account your current age, your projected longevity, the amount of money you’ve saved and the estimated rate of return you’re getting from your investments. This type of calculation is complex, so you may want to consult with a financial professional.
By avoiding these errors, you can help ensure that, at each stage of your life, you’re doing what you can to keep making progress toward your financial goals.