When you make a mistake in daily life, you usually have the opportunity to immediately make things right. If you spill soda on the floor, you can mop it up. If you burn the chicken you’re roasting for dinner, you can order takeout. In the grand scheme of things, most slip-ups have temporary consequences at worst.
But when you make an investing mistake, it can haunt you for years. The money you lose from paying unnecessary fees or choosing the wrong mix of stocks could limit the potential of your portfolio, requiring you to contribute more to reach the same total. For anyone struggling to save enough already, that may not even be possible.
That’s why investors should have a general understanding of which mistakes to avoid. Here are some of the most common.
Counting the Employer Match
If you have a 401k or other employer-sponsored retirement plan, you might be eligible for an employer match. You usually have to contribute some of your own money to qualify, and employers usually match somewhere from 50 to 100 percent of what you contribute.
At my last job, my employer matched 3% of my salary if I contributed 6%. During this time, I counted my retirement contribution as 9% total, since I was putting in 6% and my employer was adding 3%.
What I forgot to calculate was the employer’s vesting schedule, which determines when the employer contributions legally become yours. My company had a five-year graded vesting schedule, so every year I earned 20% of the employer match. I stayed there for a little less than three years, which means I only earned 40% of the company match.
My mistake was in counting the 3% match as definite, forgetting about the vesting schedule entirely. If you’re investing primarily in your company’s 401k, make sure to err on the side of caution when calculating your total contribution. If you leave before you’re fully vested, you won’t have as much saved up as you thought.
Investing Too Aggressively or Too Conservatively
I graduated in the wake of the Great Recession, and I was more than a little scared to start investing. I’d seen the stock market plummet and my parent’s retirement accounts eviscerated, so it seemed pointless to throw my hard-earned money into investing. It’s not just me – most people my age are hesitant to invest.
I remember when the 401K advisor for my employer came in to explain the system to all the recently eligible employees. A friend of mine who was also in her mid-20s said she was uncomfortable investing in something volatile, so he recommended a conservative mix of bond funds. Later when she ran the projections on her own, she realized she would never be able to retire if she only picked conservative funds.
When you adopt an overly-conservative investing approach early on, you lose out on growth potential. You’ll have to contribute a much larger sum to catch up with your peers who decided to invest more aggressively.
Being too aggressive can also backfire. If you’re too aggressive close to retirement, you could lose a huge chunk of your portfolio and not have enough time to recoup your losses.
Not Diversifying Properly
When experts talk about investing for retirement, they’re usually referring to buying a small mix of mutual funds that give you access to a plethora of stocks and bonds.
But picking out these funds is tricky for anyone who’s not an expert. If you don’t know what you’re doing, you can end up choosing stocks that are too similar to each other – or worse, risking the fate of your retirement on one or two investments. As with many things, putting all your eggs in one basket is a bad idea.
Many people invest too much in individual stocks and favorite-brand companies. When you have money in an individual stock, you’re relying 100% on that company’s performance. When you buy a mutual fund, you get access to hundreds of companies in one fund, so the risk of one corporation doing poorly is less for your overall portfolio.
Not Actually Investing Your Money
A few months ago, my friend Mary posed a question to me: why was her IRA barely increasing, when the stock market was experiencing its biggest bull run in history? She had been saving money in her IRA since graduating from college but hadn’t seen the huge returns she was reading about.
I asked what she was invested in, thinking she had put her money in something conservative like bonds. That was the only reason I could think of that would explain why she hadn’t seen double-digit returns. She responded, “What do you mean, what am I invested in? I’m investing in my IRA.”
Mary thought that when she opened an IRA, it was like opening a savings account. She assumed that the bank would pick investments for her.
Unfortunately, this mistake is more common than you might think. I’ve seen plenty of people open an IRA or 401K and contribute for years before realizing that their money is just sitting in a settlement account not earning interest or dividends. That’s like burying your money in the backyard and hoping it multiplies.
How to Avoid Investing Mistakes
Unless you’re an expert in investing or have a keen interest, you’re probably overwhelmed or unsure how to avoid these mistakes. After all, investing is like learning a new language or mastering an instrument – it takes time to become proficient.
To avoid making mistakes, find an expert like a certified financial planner or fee-only planner. These planners are usually fiduciaries, which means they have an ethical responsibility to make recommendations in your best interest. They usually don’t make a commission off the products they suggest and charge an hourly rate for their services.
You can find a fee-only planner through the National Association of Personal Financial Advisors.
If you don’t want to pay for a financial planner, you can set up a retirement investment account with a robo advisor like Betterment or Wealthfront. These robo advisors analyze your situation and use a tested algorithm to pick investments for you.