Seven most common mistakes people make in managing their Self-Directed (401k or 403b) Retirement Account.
Once upon a time, employers offered their employees pension plans to create long- term loyalty. Over time, these retirement plans evolved to be very costly to fund and administer.
In recent years those pension plans have been replaced by plans that are significantly funded and managed by the employee. Not so long ago, employees selected funds, made their allocations and for a while, it was good. Then, the stock market declined, and many plan participants who expected to take early retirement found themselves wondering if they would ever be able to stop working.
A recent study of 401(k) and 403(b) plan participants reveal the following:
- Less than one in ten of active 401(k) participants among one provider’s 8.2 million accounts are over the age of 60 and of these only one-third had an account larger than $70,000.
- Investors commit far more money into funds in the three months after the quarter in which they performed best, than after their worst quarter. Rather than buying low and selling high, investors often do exactly the opposite.
- Examining the flows into and out of mutual funds for the last 20 years, a study of investor behavior found that market timers lost 3.29% per year on average, over a period when the S&P grew by 12.9%, and the average investor earned only 3.5%.
While the bad news is that these mistakes are prevalent and will never be eradicated – the good news is you can correct all of them now. What a great thing to have that kind of empowerment!
The key is sitting down and creating a plan of action – what investment professionals call an Investment Policy Statement. Once this plan is finished, then the correcting of these mistakes can take place at once.
An investment policy outlines a prudent and acceptable investment philosophy and defines the procedures and long-term goals for the Investor.
The principal reason for developing an investment policy is to protect your portfolio from spur of the moment revisions of sound long-term investment policy. Putting it in writing will help you maintain a long-term policy when short-term market movements may be distressing and the policy is in doubt.
The development of an investment policy follows the basic approach underlying financial planning: accessing your financial condition, setting goals, developing a strategy to meet the goals, implementing the strategy, regularly reviewing the results and adjusting the strategy or the implementation as circumstances dictate.
Having and making use of an investment policy encourages you to become more disciplined and more systematic, thus improving the probability of satisfying your investment goals. The formal requirement for written investment policies originally arose out of regulations relating to company retirement plans (ERISA).
The net effort of the written policy is to increase the likelihood that the portfolio will be able to meet the financial needs of the Investor.
So avoid those classic mistakes and keep those emotions in check. Invest – don’t speculate. Have faith in capitalism and its potential. All this will add up to long-term investment success!
Investing like any other serious activity needs a fair degree of preparation at the investors’ end. Investors need to gather information and acquaint themselves with all the options available to them. Investing in a given asset class simply because you have conventionally done so is inappropriate.
- Failure to know where you want to go
- Inadequate Diversification
- Failure to Understand Risk
- Failure to Understand Returns
- Failure to Fund
- Short-Term Thinking
- Succumbing to Panic & Euphoria