Every well-built machine has at least some moving parts. When it comes to retirement investing, the dangerous moving part is — you. Early on, when you start saving, the problem of one’s own emotions often is subdued. You likely don’t have much money in your retirement accounts, and if you are in a workplace 401(k), not much say over how you’re invested anyway. In time, that changes. One day, 10 years down the road, you will take a look at a quarterly statement from your plan and realize “Wow, there’s some real money here!”
Many times this is the undoing of a retirement plan. According to a recent Forbes article titled “Avoid This Common And Dangerous Retirement Blunder,” when the balance “odometer” rolls over a large, round figure like $100,000, people begin to think about borrowing against their 401(k) for a new car or a vacation. That is the first mistake many retirement savers make, the article points out. Taking money out of your tax-deferred accounts for spending means you will only have to pay it back. It is a loan to yourself and means that you lose any market gains in the intervening years, too.
That is not the biggest blunder, however. That comes when you have moved through two or three jobs. Workers in this situation should roll over their old 401(k) money into new workplace plans or roll them over into traditional IRAs. However, Forbes says the problem—as well as the advantage—of an IRA is that you typically have to make your own investment choices.
The article suggests buying a target-date fund or a balanced fund to avoid the risks of a big mistake late in the game, but people often choose a different course. Many see their significant balances and figure, “Wow, if that’s what happened from my not paying attention, imagine what I could do by choosing my own investments!” And they do. This is sometimes called the “yard sale” portfolio with a little of this, a little of that—there is no logic to many of the investments, no rebalancing, no asset allocation — just a lot of investments in one account.
Locking in losses is the last blunder. As the portfolio balance falls older, independent investors see things getting worse and worse. When the stock market finally bottoms—and it cannot get any worse—the investor sells, locking in losses they cannot possible recover.
The Forbes article suggests owning a real portfolio that includes a variety of investments and hang on to them without emotion through all the ups and downs. Hedging against volatility as you age can help reduce the risk of an emotional blunder that will prove a costly mistake in your retirement planning.
Reference: Forbes (June 27, 2014) “Avoid This Common And Dangerous Retirement Blunder”