Biggest 401(k) Mistakes I See
James Joyce called mistakes “the portals of discovery.”
So, don’t fear making mistakes. Fear not learning from them and repeating the same few endlessly.
When it comes to financial matters, here are a few of the most harmful mistakes that, if made and repeated over and over, can do irreparable damage to your the financial security.
However, if these same mistakes are recognized, admitted, learned from and then run from, they might just do some good.
Mistake #1: under-saving. The first big mistake I see all over America is under-saving, be it in 401(k) plans, mutual funds, bank accounts or a shoe box. Americans simply are not saving enough money. There are many positive aspects of our consumer-oriented society, but those positives are not enough to eclipse under-saving.
You must save early enough and in adequately quantities if you ever want to become financially independent.
Mistake #2: financial paralysis. Most of us are investment illiterate – innumerate, some have called it. We don’t understand the basics of mutual funds, retirement plans and the like and we don’t like asking for help. Often 401(k) participants don’t understand the investment choices available to them in their company’s 401(k). And what people don’t understand, they usually avoid. In this case, avoidance equals inaction - they freeze.
And since time stands still for no man (or woman), repeating this mistake will cost you precious time – time in which your money should have been growing.
Mistake #3: never updating. The third big mistake is failing to make financial changes to reflect the fact that YOU are changing.
When you are young and have 30+ years to go until retirement, it makes sense to accept a great deal of investment risk. But as you move closer to retirement, it makes more sense to take much of that risk off the table.
Too many “set it and forget it,” ignoring the asset allocation of their 401(k) plan or any other investments they may have. This can be a costly mistake if a bear market makes a regular, if unwelcome, visit just before you collect that gold watch.
Mistake #4: always reacting (emotionally). Fourth, and finally, is emotionally reactive buying and selling. This is also known as buying and selling on fear and greed.
Last year, DALBAR reported that the S&P 500 lost 4.38% but the average U.S. investor lost 9.42%. What is the reason for this large discrepancy?
It’s the result of emotionally reacting to the market movements, rather than a disciplined approach to investing. Emotions (such as fear or greed) prompt us to do the wrong thing at the worst time.
So, don’t worry about being perfect with your investments. Be humble, seek help and be a lifelong learner about money and investments.
Do so and you’ll discover with Joyce that your investment mistakes can open investment “portals of discovery” for you too.