5 Investing Mistakes to Avoid to Protect Your Retirement Nest Egg
The first step toward building a safer financial future and ensuring that your golden years are actually golden is to invest. There is no financial growth if you’re not investing.
However, not all investing will result in positive gains. It’s crucial that you take the right steps, while avoiding some of the most common investment mistakes.
The following five investing mistakes could leave you in an unstable financial situation, which is definitely not where you want to be. As John Wasik points out in his article for Forbes, “Many of us make these errors on a regular basis. I know I have. But I discovered that once I saw what I was doing wrong, I could correct my behavior and start making money.”
Failing to Invest in Stocks
One of the most common mistakes made when investing is to avoid stocks completely. There are many good reasons to use caution when investing in the stock market. It’s a volatile place, with considerable risk. Entire fortunes can be lost in mere seconds.
Market movement alone could render your investment moot, and your money vanished. With that being said, there are plenty of reasons that you should consider putting at least some of your money into stocks, including the fact that the greater the risk, the greater the potential reward.
If you’re planning early for retirement, you can weather the storm and absorb most losses from stock market investing. However, you cannot afford to ignore this option completely. In fact, I’d go so far as to say that not investing in the stock market at all is tantamount to sacrificing growth in your portfolio. If you don’t invest in stocks, growth might be impossible.
Only Investing in Stocks
Now it’s time to examine the flip side of the coin. Investing in the stock market is important – vital, even. However, you can’t afford to make the mistake of putting all your eggs in one basket.
If you’re investing only in the stock market, you’re not doing your financial future any favors. In fact, you might just be putting it in serious danger. One market fluctuation could wipe out years of gains, leaving you with nothing, and forcing you to start saving for retirement from scratch. That’s no good at all.
So, what do you do to ensure that you’re mixing things up the right way? My recommendation is to layer stock investments with bond investments. Alternate your options so that you have a healthy mix of the two. Why bonds, though? Well, there are actually quite a few reasons, but one of the most important is the fact that when the stock market moves downward, the bond market rises.
While that will not equate to massive gains, it does offer financial security. Whatever losses you incur due to stock market fluctuations will be offset by gains in the bond market. Thus, your nest egg is protected and you’re able to build your wealth over time, while reducing overall risk.
Failing to Use 401(k)s and IRAs
Think that stocks and bonds are the only investment vehicles you need? Think again. You should be making use of every tool at your disposal, and that includes 401(k) accounts and IRAs.
Why, though? These accounts don’t really deliver major financial gains, and they’re definitely not as flashy as huge wins on the stock market. They also don’t offset losses from other investments. So, why include them in your portfolio at all?
Really, it’s all about reducing your tax liability while still building for your financial future. Whether you opt for an IRA or a 401(k), you’ll find that you can access your dividends without having to pay a ton of cash to the government for the privilege.
You’ll also find that there are no capital gains charges associated with sales in an IRA or a 401(k) account. So, these accounts allow you to contribute toward your retirement nest egg, avoid taxation problems, and also get around capital gains. That sounds like a win-win to me.
Of course, you need to make the right choices when it comes to how much you’ll contribute to your 401(k), and which type of IRA account you choose (standard, Roth, etc.). However, the first step is the most crucial – just opening an account and contributing to it.
Choosing Bond Funds Rather Than Individual Bonds
The fund manager makes all the decisions, and there’s a great deal more risk with this than even with playing the stock market. High-quality individual corporate bonds, on the other hand, have very little in the way of risk, and a predictable reward that you can count on moving forward.
Failing to Invest in Municipal Bonds
Corporate bonds aren’t the only such instruments you should consider. If you’re not investing in municipal bonds, you could be missing out on a powerful tool that can help you build for the future quite easily.
One of the reasons you should consider these bonds is that they’re exempt from federal taxes. Municipal bonds are issued by local governments and municipal authorities. Uncle Sam has very little say over them.
When everything is said and done, you need to take a multistep approach to retirement planning in order to protect your nest egg. There are many options that should be harnessed, but they need to be used correctly, and you cannot afford a misstep here.
Your financial future depends on making sound decisions with your money now. Know the risks you’re taking, take steps to offset those risks, and grow your portfolio with investment vehicles that ensure stability and predictability, seasoned with the potential for growth.