In my years as a financial coach, I've heard countless people tell me heartbreaking stories about investment mistakes they made—mistakes that cost them thousands of dollars and valuable time. That's one of the reasons I'm so passionate about helping people change the way they think about money and investing. I know what happens when you make smart money decisions—and what happens when you don't.
The good news is that you can learn from others' mistakes and avoid the pitfalls that robbed them of a secure financial future. Here are five big ways you could derail your retirement dreams.
- Running on emotion. Making financial decisions based on how you feel is a recipe for disaster. Fear and greed can kill your retirement fund. Investing is a marathon, not a sprint. When the market takes a downturn (and it will), some people panic and cash out all of their investments because they're afraid the market won't ever recover (but it will). Bad idea.
The Dow Jones Industrial Average measures the growth of the stock market based on the stock prices of 30 major companies. In February 2009, that index dropped to 7,889.79. By February 2010, it had rebounded to 11,295.83. Today, the market index is at 17,787—less than a decade later. If you cashed in your investments in February 2009, you missed out on their recovery and future growth. That's why you never, ever make any investing decisions when you're scared. And that's why you always talk to an investment professional first.
- Putting all your eggs in one basket. You probably heard your grandmother tell you this piece of advice. Turns out she's right—especially when it comes to investing. If you put all of your money into one stock, you're taking a huge risk. Ever heard of a company called Enron? It was worth about $70 billion in 2000. But that same company went bankrupt in 2001, and some investors lost everything because they'd invested all of their money in this one company.
That's why I like mutual funds. They are like the salad buffet of investing. Different kinds of stock—like aggressive growth, small‑cap and overseas—are bundled together and sold as a unit. Depending on the stocks, mutual funds can minimize your risk and give you the best chance to grow your money over time.
- Not investing enough. If you want to enjoy the retirement of your dreams, you need to invest at least 15% of your income. If you're just getting started and can't swing that much, then at least invest enough to take advantage of your company's matching program. If you don't, you're robbing yourself of free money!
If you're paying off debt—which should be your first priority—then you may put investing on hold or reduce the amount you're investing temporarily. But once you're debt‑free, you need to crank up the intensity, even beyond 15%! A little sacrifice now will pay off later—literally.
- Thinking you don't make enough. This lie trips up lots of young professionals. When you're just starting out and get your first "real" job, you may think investing is impossible. But listen up: You're never too young to start investing. And the earlier you start, the better off you'll be. That's because compound interest and time are your best friends.
Let's say you start investing $2,000 a year (about $167/month) when you're 22 years old. Assuming 10% growth a year on those investments, you'd be looking at $1.5 million by age 67 (today's retirement age). If you waited until you were 32 to begin investing that $2,000 a year, you'd have around $600,000. In the early years, you may not be able to invest 15%, but you can invest something. And something is better than nothing!
- Borrowing from investments. I get it—as your investments grow, you're more tempted to use that money to buy a car, pay off a house, or take care of a major emergency. According to CNBC, of the money invested into 401(k) plans in 2012–2013, about 24% was withdrawn for non‑retirement purposes. That's a really bad idea!
You shoot yourself in the foot when you borrow from that account. If you leave the investments alone, they will grow with compound interest over time. But when you take money out, you're stealing from your own future! Not only that, but as you pay back that "loan," you're rebuying those shares at the current market price, which will likely be higher than when you sold them!
But that's not even the worst news. In 2014, Fidelity reported that 50% of people who took out a loan against a 401(k) ended up taking out additional loans. Not only that, but 24% of the borrowers lowered their savings rate and some stopped saving altogether. Unfortunately those people are just digging themselves deeper into debt—and robbing themselves of a great retirement.
I want you to make smart decisions with your investments. Your future is at stake! That's why I'm so passionate about talking to people about how to make their retirement dreams come true. That's also why I always encourage people to talk to an investment professional before making big money decisions. Your retirement is on the line, so don't let these mistakes derail you!