If you are close to retiring or have the fortune of being retired, here is a quick opportunity for you to learn about mistakes people make when they invest in the stock market. Always keep in mind that everyone’s situation is different so it is important recognize your specific circumstance.
Mistake #1 – Buying or Selling Stocks Based on Emotion
Everyone is familiar with the phrase, “buy low and sell high”. However, market research shows that people tend act in exactly the opposite manner. If stocks are trending upward, their emotions tell them to ride it out a little while longer to maximize profits. This perspective may be even more difficult to ignore for those whose fortunes decreased back in the mid 2000s. If you entered the market when share prices were lower and you have made a profit, consider selling while you are ahead.
Conversely, you may be in the middle of a downward trend in the market. In this situation, you must know your living expenses, which will help you make a logical decision. Keep in mind that every percent that your portfolio decreases, you need to gain two-percent to get even, especially if you are no longer actively purchasing shares. Also keep in mind that you do not have the same amount of recovery time as you did 20 years ago.
Mistake #2 – Going too extreme. Risky to Highly Conservative
During the 1980s Cds were yielding over 16 percent with absolutely no risk. People who were retiring during that era who also had their homes paid off were ecstatic with their bank portfolio because their money was giving unheard of rates of return. Nowadays retirees assume that their money is better of outside of the risky stock market. Guided by this belief, they flock toward money market accounts, Cds, and other no-risk investments. As of the time of this writing, no-risk investments give either very low or no rates of return.
Believe it or not, this is actually a risky decision, and let me explain why: if you are like most retirees you are no longer generating income. If that is true, then your money could be suffering inflationary risk. If you took $1,000 and put it under your mattress today, will that $1,000 be able to buy the same amount of gas, vacations, and groceries 10 years from now? We all know that your $1,000 will have less purchasing power as time passes. Therefore, we recommend that you make it your goal to gain a higher rate of return than the rate of inflation.
Mistake #3 – Using an All-In or All-Out Approach
Depending on your risk tolerance and your need for current income, you may want to find a way to diversify your money. Leaving some of your portfolio in stocks may be a good idea, but consider a more conservative asset allocation mix. If you decide to take out your all of your money, taking it out from the most risky to the most conservative is a prudent approach. Also, if you roll your money into an indexed account, the money is automatically diversified.
As a retiree, this should be the most enjoyable time of your life. Financially, the stakes are higher than they have ever been before. Time and timing is critical, and therefore any mistake you make becomes magnified. Because of this, understand that this blog is not meant to provide investment advice, but ideas to consider before you take any action. Be sure to seek the guidance of an expert to help you make informed decisions that best meets your financial needs.
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