5 Mistakes Investors Make By Going Solo on their Retirement
Many Americans have taken it upon themselves to do the vast majority of retirement planning without the help of a financial advisor. While that is perfectly fine and legal, it is not entirely wise considering the long-term margin for error. Plenty of things can go wrong, and they do, often leaving investors lost and confused about what they can do to better their circumstances.
What mistakes can they make? Plenty, but there are five major errors committed by solo investors that can greatly impact their ability to maintain wealth throughout their retirement.
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1. Being Too Conservative
Most of us remember the market meltdown in 2008-2009 and don't want to risk losing copious amounts of money in the stock market. Unfortunately, being too conservative with your investments, especially when you're young, can be a huge mistake. A good rule of thumb is to subtract your age from 100 and this is the percentage of your portfolio that should be invested in stocks. For instance, if you are 30 years old, then 70% of your portfolio should be in stocks and 30% should be in bonds. However, this suggestion is a bit dated since Americans generally are living longer: instead, increase that number anywhere from 110 to 120 (depending on your longevity expectations), and you may even find that your portfolio should consist of 90%-100% of stocks while you are young.
2. Being Too Aggressive
On the other hand, being too aggressive with your portfolio, especially when you are older and closer to retirement, is not good either. The closer you are to retirement (generally about 5 years out), the more you want to ensure your wealth is preserved to avoid the risk of losing it all in the stock market right before you stop working. Around this time, you should be sure that the bulk of your portfolio has exposure to the bond market, and a smaller percentage in the stock market.
3. Forgetting to Re-balance
An overwhelming number of investors don't even know what re-balancing is, let alone remembering when its time to do so. Re-balancing is the process of double-checking to make sure your money is allocated properly in terms of overall amounts. It's essentially a way to make sure that your investments stay in line with your long-term goals. However, this can be difficult to do on your own so be sure to stay educated on this process, especially if you are going solo in retirement planning.
4. Investing in Cash
While more people are keeping cash in the bank rather than stuffed in a mattress, keeping your wealth in the form of cash is a terrible way to build wealth over the long-term. Why? Cash loses value over time, returns on savings accounts are close to zero, your purchasing power will go down over time due to inflation. Need more reasons not to "invest" in cash? Check out this article.
5. Not Avoiding Hidden Fees
According to Inc., a whopping 92% of Americans don't know what they are paying in fees on their long-term retirement accounts. This is a HUGE problem, especially if you're managing retirement money solo. Forbes recently noted that a mere 0.93% difference in hidden fees between two funds can cost up to $215,000 for a single investor over their investing life! How? Compound interest...it's a powerful thing.
Can you go solo on planning for retirement? Yes, but just like replacing the plumbing in your whole house, it is not recommended.