Beware these investing blunders.
When it comes to investing through your 401(k), it’s easy to be swayed by financial news pundits, make bad decisions about your portfolio allocations or simply fumble your investing strategy. In fact, some of the following investing mistakes may sound a little too familiar. To help you avoid them and keep your 401(k) in top shape, U.S. News Smarter Investor bloggers share some advice.
Not diversifying across asset classes
Closely examine your portfolio. Is it chock-full of large-cap growth stocks but holds little else? Your investments should be able to see you through many market cycles, so make sure to diversify across asset classes, says Scott Holsopple, president of Smart401k. “The most widely recognized investments in both equities and fixed income are (from most aggressive to least aggressive) international; small-cap, mid-cap and large-cap stocks; bonds; and short-term, fixed-income investments,” he writes.
Buying funds based on their past performance
The Securities and Exchange Commission requires funds to tell investors that past performance doesn’t necessarily predict future results. “Yet mutual fund advertising is often about the stellar past returns of its best-performing funds,” writes Dan Solin, director of investor advocacy for the BAM Alliance and a wealth advisor with Buckingham.Asset Management. “Mutual fund companies tout past performance for one reason: It works, even though the relationship between past and future returns is highly problematic.”
Never increasing your contribution rate
Many people think once they set their automatic 401(k) contribution, they’re golden. But reminding yourself to increase that contribution rate by at least 1 percent annually will pad your nest egg in the long run, Holsopple says, adding that you should keep in mind the annual contribution limits for work retirement plans. “It’s likely you won’t feel the difference in your paycheck, [and] the impact on your nest egg will be noticeable once you reach retirement,” he writes.
Making decisions based on financial news
Investors should be aware of financial news, but they shouldn’t obsess. “It’s important to remember media outlets tend not to focus on long-term trends, but the ‘hot’ news of the day,” Holsopple writes. “Although a sharp drop in the markets could make headlines at the top of the week, a steady rebound over the next few days may not.”
Failing to capture the company match
Many companies offer matching 401(k) contributions if employees contribute a certain percentage of their pay or more. It’s important not to miss out on the match. “If your boss walked in and offered you a 3 percent raise, you’d never tell her, ‘No thanks,’ but by not taking full advantage of matching contributions, that’s exactly what you’re doing,” writes Kelly Campbell, founder of Campbell Wealth Management.
Not consolidating your accounts after leaving an employer
If you’ve changed jobs multiple times in your career, you may have several “orphaned” retirement accounts floating around. “There are numerous advantages to consolidation, but it really boils down to ease,” Holsopple writes. Consolidating means you’ll have fewer statements to keep track of, less overlap in investments and you won’t have to rebalance multiple times. Rolling these accounts over into your current 401(k) or an individual retirement account will save you time and energy.
Dumping a large sum into the stock market now
Taking history into account, the average market price-to- earnings ratio is likely to revert to its mean P/E and possibly drop in value or rise less quickly. “If you’re fortunate to have a large sum to invest, don’t put it all in the stock market right now. Invest it in equal amounts over the next few years to avoid the possibility of going all in at the highest valuation,” writes Barbara Friedberg, author of “How to Get Rich Without Winning the Lottery.”
Making excuses like ‘I can’t afford to contribute much, so it’s not worth my time.’
Contributing a small amount to your 401(k) is better than not contributing at all. “Because of the power of compounding — the ability of an investment’s earnings to themselves earn a return — a very small investment can eventually grow into a significant amount of money,” Holsopple writes.
Not rebalancing
“The stock markets fluctuate like sea currents: There are highs and lows with plenty of waves in between … Managers leave, funds overperform or underperform their objectives and economic conditions change,” Campbell writes. He advises scheduling a time once per year to rebalance your portfolio and bring your target allocations back into alignment.
Not taking advice when it’s available
If you need professional help with your portfolio, don’t put this task on the back burner. “You should take advantage of any in-plan advice offered, whether provided through your company as an employee benefit or through the plan administrator. If in-plan advice is unavailable, you could also look into online advice,” Holsopple writes.
More from U.S. News
How to Whip Your 401(k) Into Shape
8 Retirement Milestones That Affect Your Investment Decisions
Should You Invest or Pay Off Debt?
10 Mistakes You’re Making in Your 401(k) originally appeared on usnews.com
