Once again, it’s Halloween. If you’re an adult, you’re probably more amused than frightened by the variety of ghouls, ghosts and goblins you’ll see running around this week. However, although Halloween itself may not be particularly alarming, you can find some things in life that are truly scary - such as making bad investment moves.
Here are a few of these alarming errors to avoid:
Investing too little in your 401(k) - If you have a 401(k) or similar employer-sponsored plan, you owe it to yourself to take full advantage of it. Your contributions are generally made with pre-tax dollars, so the more you put in each year, the lower your taxable income. Plus, your earnings have the potential to grow on a tax-deferred basis. Furthermore, you may have a dozen or more investment options within your 401(k), so you can spread your dollars around in a way that reflects your risk tolerance and retirement goals. At the very least, contribute enough to earn your employer’s match, if one is offered. And try to increase your annual contributions every time your salary goes up.
Ignoring your IRA - Even if you have a 401(k), you can still open an IRA. Many people do this - but then forget about it. For 2007, you can put $4,000 into an IRA, or $5,000 if you’re 50 or older. A traditional IRA offers the potential for tax-free earnings, while a Roth IRA can grow tax-free, provided you’ve had your account for at least five years and you don’t take withdrawals until you are at least 59-1/2. And you can fund an IRA with virtually any investment you choose.
Investing too conservatively - Many investors are so uncomfortable with the volatility of the stock market that they put much of their money in more "conservative" investments, such as Treasury bills, corporate bonds and certificates of deposit. It’s true that these types of securities will, in general, offer more preservation of principal than stocks, but they will not provide much growth potential. So, if you’ve "loaded up" on these fixed-income vehicles, you could lose purchasing power, over time. Over the long term, only stocks have historically outpaced the rate of inflation, although past performance is not an indication of future results. Consequently, if you are saving and investing for retirement, you will certainly need an appropriate amount of stocks in your portfolio.
Chasing "hot" stocks - If you follow a tip on a "hot" stock, you could get burned. Why? For one thing, by the time you buy the stock, it may already be cooling down. Even more importantly, it simply may not be appropriate for your individual risk tolerance and long-term goals.
"Timing" the market - If you could always "buy low and sell high," you’d unquestionably make a fortune as an investor. Unfortunately, no one can really predict when market highs and lows will occur - and you can rack up a lot of expenses buying and selling your investments in a vain attempt to "time" the market. You’re much better off by buying quality investments and holding them for the long term, or at least until your needs change.
There’s no trick to avoiding all these investment mistakes - and if you do, you may just find your investment statement is not so spooky to read.
Evans is a financial advisor for Edward Jones in Richmond Hill.