When it comes to investing, many folks have had bad experiences that have left them disappointed, mad or just plain scared. As a result they head off to the bank with their money, buy annuities, swear off investing in those rigged financial markets, or fire their financial advisor. Maybe, just maybe, they need look no further than themselves to blame. I offer below some real world examples of bad investor behavior, in hope it may help you behave better.
Changing your investment strategy as a result of what is going on in the financial markets is a no no. The most common example is lowering the risk in your portfolio AFTER the markets went down. An example might be going from 60% stocks to 40% stocks. The problem here is that that when markets recover, you will not participate as much as you would have if you stayed with your original strategy. You just guaranteed yourself a lower investment return. And if you repeat this action by going to an even lower risk strategy the next time the markets go down, it will take a long time, if ever, to get back to where you were in the beginning.
A variation of the above behavior is going to cash, again AFTER markets go down and saying to yourself “I will get back in when things get better”. What you just did is sell low and plan to buy high later. That doesn’t sound right?
Many folks own company stock in their 401k plans, or are buying company stock outside of their retirement plan. It’s okay to own some company stock. If the company has done really well for a long time, folks might own a lot of company stock. If you own more than 10% of your investment assets in your company stock, you are taking more risk than you may realize. If you own more than 25%, just ask yourself if you can take a permanent 25% hit in your retirement assets and be okay. Diversification is a wonderful thing! Lack of diversification is a bad thing!
Conventional wisdom (usually wrong) suggests that you should lower the risk in your portfolio as you get older. I am actually okay with that strategy …. to a point. You should always have some percentage of stock investments in your portfolio to protect your money from inflation. Or said differently, if you have 100% of your portfolio in bonds, taxes and inflation will kill you. As I write this piece, the U.S. ten year treasury bond is at 2.19%. Can you take 2.19% a year from your retirement assets, pay taxes and inflation, and live happily ever after for a long time on what’s left?
Last but not least, many folks are withdrawing money from their retirement assets at a higher rate than what their portfolio can earn. That is because most of us can’t save enough money to NOT tap into our capital at retirement. Yes, it is okay to tap into your capital at retirement. The problem is that you have to monitor this closely, and adjust your withdrawals so that you don’t run out of money before you run out of life.
When it comes to your investments, please behave wisely.
Michael McNamara, Ph.D., CFP®
CERTIFIED FINANCIAL PLANNERTM