How to Avoid 6 Common Investment Mistakes Most Retirees Make

6 Common Mistakes

10 years ago managing your own retirement was not very complicated. Buy mutual funds, stocks and bonds for a 60/40 allocation, collect the dividends and interest, and use it to pay bills while the principal remains steady.  Then 2008 happened.  Do you remember the S&P 500 falling 36%?  Today’s retirement has changed dramatically, so have the investment choices, and the room for error has become razor thin.  Especially if you’re living off your nest egg for income and another market crash happens again.  With this in mind, here are six mistakes that retirees should avoid.

Avoid having excess cash

Retail clients are advised to avoid having excess cash on hand.  With the level of inflation retirees face from rising health care and living expenses, it’s hard to think of a surer way to lose money safely than sitting in excess cash.

For retirees who cannot stomach volatility, consider simply take half of the excess cash and deposit in an online FDIC-insured bank at a 1.00% rate.  Then, take the other half and invest in one or more bond funds, preferably a low cost ETF, with durations less than three years.  If you want examples for your own portfolio, please let me know.

Holding concentrated positions

I have seen this many times with clients.  Emotional attachments can develop for stocks that (1) have been handed down over generations, (2) represent the life achievement of a family member, or (3) simply made a retiree very wealthy over the years. Often these holdings grow to the point where they expose a retiree to the risk of an undiversified portfolio.

Any emotional link to an investment is guaranteed to be a one-way street, so either sell down concentrated positions or talk to a financial advisor about strategies to hedge this risk if it cannot be sold.

Ignoring fees on products sold by brokers

Since most brokers are incented to sell retirees products that make them the most commission, I’m not kidding by the way, it’s up to you to do your own due diligence.  Or contact a fee-only advisor and ask for help.  Three products require extra warning:

  • Mutual Funds: Look out for loads and 12B-1 fees, which allow fund managers to pass along their marketing costs to retirees. Don’t let them use your hard-earned money to sponsor sporting events. SEC warning here: http://www.sec.gov/investor/pubs/mfperform.htm
  • Variable Annuities: Fees can add up to 3-5% annually. Be especially skeptical when a broker recommends swapping from one annuity to another; you may end up paying surrender fees only to move to an inferior product. The SEC has issued an investor warning on variable annuities that you can review here. http://www.sec.gov/investor/pubs/varannty.htm
  • Non-Traded REITs: These offer lofty yields, but the commissions often exceed 10 percent, making the hurdle rate insanely high. SEC investor bulleting here:

https://www.sec.gov/oiea/investor-alerts-bulletins/ib_nontradedreits.html

Consider hiring a fee-based financial advisor that operates under the fiduciary standard. This person is legally bound to only select investments that are in your best interest.

Owning way too much gold

There are many opinions about gold, from owning solid coins or bars to mutual funds, ETFs, and individual stocks.

However, when it comes to your portfolio, it’s best for retirees to view gold as just another investment.  Gold does have a lack of correlation to other assets that can provide needed strength during times of financial stress.

Keep the amount to 5% or less of total investable assets and never a trader with it. Anything higher than 5% risks adding more volatility than most retirees can handle, and gold’s average to below average long-term returns don’t justify the added instability past this amount.

Don’t believe everything you hear from “Gurus”

The internet has given rise to a particular type of low life who preys on your fears. These are sometimes referred to as “fear mongers,” because they prey on emotions for the sole purpose of making money.

Recessions happen, stocks lose investors’ money, and economies collapse under too much debt. But these events don’t happen that often, and those who predict the end of the world are usually trying to sell you their book.

Don’t try to keep busy in retirement

You have worked long and hard to achieve a lump sum to live on for the next chapter in your life.  Be able to answer questions like “What do I want to accomplish at this stage of my life?”  There is no need to rush in and jump at the first opportunity to keep busy.  It’s a journey, there are many cross points along that journey, and there will be plenty of adventures for you to write about.

 

Until Next Time,

Scott