The 3 Most Common Mistakes Investors Make
Most people have specific dreams about their retirement years. What’s yours? Do you want to live in a beachfront condo in Florida? Travel the country in your RV? Or maybe spend your days indulging in your favorite hobby? Whatever it is, your retirement dream likely requires money.
Unfortunately, most people don’t have a specific plan in place to fund their retirement years. Sure, they may have an IRA or two, but they don’t have a specific monetary retirement goal. This is alarming, because studies have shown that most Americans will need approximately 75 percent of their pre-retirement income in order to maintain the lifestyle they have become accustomed to while employed. Furthermore, studies show that 60 percent of retirees’ income needs to come from personal savings. So the message is clear: if you haven’t yet begun to save, start now! SourceFarrell, Dolan, and Van Harlow, “Lifetime Income Planning,” FMR Corp., Aug 2003.
No matter what you envision for your golden years, you’ll have a higher chance of making that dream a reality when you avoid these three common mistake investors make.
1. Not saving enough of what they earn.
Most people today live paycheck to paycheck and save little to no money for their future. For some, living paycheck to paycheck is sheer necessity; for others, though, it’s lack of proper planning.
The general rule of thumb is to save at least 10% of your income. Saving more may put a strain on your day-to-day living, and saving less may not be enough to make an impact on your future. And when you think about it, 10% really isn’t that much of your total income. For example, if you earn $800 per week, that’s only $80. For most people, that’s dinner for two out at a fancy restaurant. Most people can easily cut 10% out of their spending by limiting the number of times they go out to eat, or the number of super grande non-fat mochachinos they order each week.
2. Not investing enough of what they save.
Saving 10% is just one part of the equation. You also need to invest part of your savings. Most people will want to put a portion of their saved money aside in a bank, so they have access to emergency money should they need it. But a traditional savings account alone typically will not fund your retirement. Therefore, you may also want to invest part of your 10% into a retirement account, such as an IRA, Roth, or Money Market portfolio. Doing so will often give you better long-term results, as you can invest as aggressively as you’re comfortable with, and can ride out any market highs or lows. For the best investment strategy, talk with a qualified financial planner.
3. Not diversifying enough of what they invest.
Some people tend to stick with one investment type, and they put all their money towards that one investment. But as the old saying goes, “Don’t put all your eggs in one basket.” As you invest your 10%, be sure you diversify your investments. Diversification, also called asset allocation, is the act of balancing the three common investment classes: stocks, bonds, and cash reserves. By spreading your assets out over a wide range of investment opportunities, you allow yourself the ability to ride out market fluctuations, as losses from some investments are offset by gains from others.
The first step is to decide how much of each asset type you’d like in your portfolio. To do this, seriously analyze your risk tolerance, your current income needs, and your time horizon for reaching your financial goal. If you plan to retire very soon, then you’ll likely want lower or moderate risk investment approaches. However, if you have many years before you retire, you can typically invest more aggressively. Again, a qualified financial planner can help you make the best decisions for your situation.
Mistake-Proof Your Future
Regardless of what you envision your golden years looking like, you need a solid plan to help get you there. By avoiding these three common mistakes investors make, you’ll have a higher chance of living the retirement you always wanted.
To discover an asset allocation strategy for your needs, contact
Chad Coe, CWS, RFC is President of Coe Financial Group, Inc. in Deerfield, IL Contact him at 847 444-9444 or chad@coefinancial.com.
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