Retirement planning is a fascinating adventure, and for many people, the stock market is essential to achieving their retirement goals. But, it’s important to proceed cautiously and avoid several typical mistakes that might jeopardize your financial goals. Understanding these potential hazards might be the difference between a stress-free retirement and one full of twists and turns on the path to retirement.
Failing to Start Early
We have written extensively about the power of compound interests. One of the most significant advantages you can have when investing for retirement is time. Yet, it’s surprising how many underestimate the incredible power of starting early.
Time is your best friend in the world of investing. The earlier you start, the more time your investments have to grow. Don’t procrastinate. Even small, consistent contributions can make a significant difference over the long term.
That being said, if you have been procrastinating, we’ve also stated that:
The best time to start investing is as young as possible.
The 2nd best time to start investing is right now!
We believe that any investing outweighs having no investing.
Expecting to See Results Quick
The worst thing to do when investing long-term is constantly checking your portfolio. Remember, we’re talking long-term investing, not day trading or swing trading. Patience is the key here, especially when investing in low-cost Index Funds.
A similar analogy for expectation setting is planting a seed to grow a tree. Imagine finding the perfect location to plant a tree. You prepare the area by digging the ground, planting the tree, and providing ample water. If you constantly visit the tree and expect the tree to grow quickly, you’ll be disappointed. You might be able to see some growth after a year, but you’ll most likely see change after 10-30 years. And that should be the mindset with investing.
Remember that the S&P500 index (likely the core in any investment), when looking at ANY 30-year timeframe, the average annual return has been 10% a year. We’re talking about World Wars, .com bubble bursts, bank crises, and a pandemic. History has shown that the stock market is resilient in the long run.
Panic Selling During Market Volatility
We just talked about the stock market resiliency above. Market volatility is like a thunderstorm on your journey to retirement. It’s inevitable, and at times, it can be downright nerve-wracking. One of the most common mistakes investors make during these turbulent times is giving in to fear and panic-selling their investments.
Imagine this scenario: You wake up one morning to headlines shouting about a sharp drop in the stock market. Your heart races and your mind fills with uncertainty. You might be tempted to hit the sell button and cut your losses, thinking it’s the safest move. This reaction is entirely human and often driven by fear, a primal emotion hardwired into our DNA.
The problem with panic selling is that it’s a knee-jerk reaction to short-term events that can have long-term consequences. A perfect example of this is during the latest volatility during Covid 19. From mid-February 2020 to mid-March, the market dropped over 36% during that 30-day timeframe. If you had panic sold your investments during that time, you not only locked in your losses. You also saw the market recover back to February highs by August, and you missed out on an additional 38% pop the following year and a half.
If you follow our suggestion in continuous dollar-cost-averaging in the market, you would have done pretty well during the Pandemic, continuously buying shares during the drawdown and reaping the rewards in the uptrend.
Trying to Time the Market
Timing the market means having the ability to buy when the market is at its lowest and not buying during a market downturn. Market timing is a gamble that few can consistently win. Instead of trying to predict market movements, focus on a long-term investment strategy. Stay invested through market fluctuations, as attempting to time the market often leads to missed opportunities and losses.
Remember that long-term investing is a marathon, not a sprint. Consistency in your investment approach, such as dollar-cost averaging (investing a fixed amount regularly), can be more reliable than trying to time the market’s highs and lows. It reduces the impact of market volatility on your portfolio.
Chasing Fads and Hype
We’ve all heard of these meme stocks that rocket 50%, 75%, and even 100% in a short amount of time. You open social media and hear all of these “experts” predicting the next rocket. This is where FOMO (Fear of Missing Out) anxiety comes in. Who wants to make 10% a year when you can make 100% in a month?
Remember this, 85+% of day traders lose money as well and nearly 90% of fund managers failing to beat the S&P500. It is a fact that people who make a career and get paid to make a living over making stock selections cannot beat a regular Joe just consistently buying VOO/SPY. Many articles have been written about dead people being the best investors. The moral of the story is to stick to your plan, buy and hold, and don’t overthink things.
That being said, I know there are many gamblers at heart and love the thrill of making the right picking. If you are one of those, we suggest allocating 5-10% of your portfolio for these investments and keeping 90-95% for Index Funds.
Takeaways
In the quest for a secure retirement, it’s vital to sidestep common investment pitfalls. We’ve stressed the significance of starting early and how time can work wonders for your retirement savings. Even if you’ve procrastinated, beginning now is the next best step. We’ve also emphasized the importance of patience in market fluctuations, as investing is long-term. Panicking during market volatility can result in locked-in losses and missed opportunities. Trying to time the market, a risky work, often falls short compared to a consistent, long-term investment approach. Lastly, while the allure of quick gains is tempting, chasing fads and hype can disrupt your financial plan. Stay focused, stick to your strategy, and allocate wisely for a prosperous retirement.
We would like to emphasize that we are not financial advisors. The information provided on this website and in our YouTube videos is strictly for educational purposes and represents our personal opinions. To ensure the most appropriate financial decision for your specific needs, it is essential to conduct thorough research and, if necessary, consult with a licensed financial advisor. It is important to acknowledge that all investments involve inherent risks, and there is no guarantee of success in generating, saving, or investing money. Additionally, there is a possibility of experiencing losses when investing. It is crucial to exercise prudence, make informed choices, and independently verify information.
