Moore for your Money
BYRON MOORE, CFP®
Question: I’m just about to start in my company’s 401k. I’m super excited, but I am also concerned. I don’t want to mess this up. So what are the biggest mistakes you’ve seen people make with their 401k and how can I not do that?
Answer: James Joyce called mistakes “the portals of discovery.”
So don’t fear making mistakes. Fear not learning from them and repeating the same few endlessly.
Here are four of the most harmful mistakes that, if made and repeated over and over, can do irreparable damage to the financial security of 401(k) participants all over America. However, if these same mistakes are recognized, admitted, learned from and then run from, they might just do some good.
Mistake #1: Under-saving. The first big mistake I see all over America is under-saving, be it in 401(k) plans, mutual funds, bank accounts or a shoe box. Americans simply are not saving enough money. There are many positive aspects of our consumer-oriented society, but those positives are not enough to eclipse under-saving.
You must save early enough and in adequate quantities if you ever want to become financially independent.
Mistake #2: Financial paralysis. Most of us are investment illiterate – innumerate, some have called it. We don’t understand the basics of mutual funds, retirement plans and the like and we don’t like asking for help. Often 401(k) participants don’t understand the investment choices available to them in their company’s 401(k). And what people don’t understand, they usually avoid. In this case, avoidance equals inaction – they freeze.
And since time stands still for no man (or woman), repeating this mistake will cost you precious time – time in which your money should have been growing.
Mistake #3: Never updating. The third big mistake is failing to make financial changes to reflect the fact that YOU are changing.
When you are young and have 30+ years to go until retirement, it makes sense to accept a great deal of investment risk. But as you move closer to retirement, it makes more sense to take much of that risk off the table.
Too many “set it and forget it,” ignoring their 401(k) asset allocation. This can be a costly mistake if a bear market makes a regular, if unwelcome, visit just before you collect that gold watch.
Mistake #4: Always reacting (emotionally). Fourth, and final, is emotionally reactive buying and selling. This is also known as buying and selling on fear and greed.
DALBAR reports that in 2014, the S&P 500 had a 20-year annual rate of return of 13.69%, yet the average equity investor only achieved a 5.5% return. How does such a huge disparity occur?
It’s the result of reacting emotionally to the market movements, rather than having a disciplined approach to investing. Emotions (such as fear or greed) prompt us to do the wrong thing at the worst time. For example, when investors sell after markets have fallen, they lock in their losses. Conversely, when investors keep buying what was “hot” yesterday, they chase yesterday’s performers and wonder why it seems the juice has already been squeezed out of the fruits of their labors.
So don’t worry about being perfect with your investments. Be humble, seek help and be a lifelong learner about money and investments.
Do so and you’ll discover, like Joyce described, that your investment mistakes can open investment “portals of discovery” for you, too.