“Do-It-Yourself” for investing for retirement grants you more control over your money and it can save you some money too. However to avoid detours and pitfalls, you probably want to check out the following list of common mistakes that people tend to make when they take on this DIY approach.
Unable to Manage Stocks
Not everyone is like Warren Buffet. Before you consider being your own portfolio manager, you can assess your capability by asking the following three questions. You probably need to answer “yes” to ALL of them to assure your confidence in working for yourself.
Am I capable of evaluating the companies’ prospects from a micro scope as well as the overall condition of the sector/economy? To wisely pick your own stocks, you at least should be able to analyze basic financial information to predict the company’s future earnings. The key information could be found in the company’s balance sheets and income statements.
Do I have enough time to devote to my research? Equity research can be time consuming. It takes time to research prospective companies and pick one to invest in; it takes time to allocate your asset and build your portfolio by analyzing returns and risks; more over it takes time to monitor your investment since stock prices can change rapidly. If you work from sunrise to sunset and can barely keep up with the tides in the market, you probably should relieve yourself by handing over all that time-consuming research and monitoring job to an investment company.
Do I have enough money to start off? Or do I have enough money to diversify my portfolio? When you make investments, part of your returns has to be taken away by your brokers. Since most brokerage commissions are counted for each transaction but your returns are earned as a percentage of your investment, you need to put down enough money at first so that your returns can exceed the cost of brokerage commissions.
Overlook the Risks of Bonds
Treasury bonds are safer investment than stocks because the norminal income is regular and the prices do not change as dramatically as most stocks’ prices do. However the “no free lunch” tells that investing bonds also bear substantial risks that may jeopardize your efforts to preserve wealth for retirement. You need to be cautious of the following risks:
High inflation rate can eat away Treasury Bond yields, no brainer.
Both high budget deficit and high interest rate tend to suppress bond prices, and therefore reducing the value of the bond if not intended to be held to maturity.
Foreign countries hold $2.6 trillion worth of treasury securities. If the dollar continues depreciating, the foreign holders may lose confidence in a weak dollar and unload the debt they have bought. This may force down bond prices. Such risks from oversea should not be neglected.
Treasury Bonds are taxed immediately by the federal. In the long term, taxes, together with inflation can erode yields.
You do not need to be an economist. But it is important to understand what direction our economy is going and what impacts the monetary or fiscal policies will have on the bonds.
Lack of Strategies in Mutual Funds Investment
Even though letting fund managers to take care of your investment relieves you from a lot of work, you still need be careful with fund selection:
Selecting funds haphazardly usually results in inefficient asset allocation and ineffective diversification. Consequently the portfolio performance may not meet your target saving for the retirement plan. You want to spread your assets over different fund categories and various sectors to reduce overall risk.
Betting on high-risk funds leads to excessive volatility returns. Keep in mind that the money you set aside for retirement investment is to generate stable income and sustainable growth. You want to separate your retirement investment from other aggressive money making investments.
Having unrealistic faith in fund managers is another common mistake that people tend to make. Despite their experiences, fund managers are no less exposed to potential bear market risks than you. The clash in 2008 has shown that many fund managers failed to retain the wealth of investors and failed to effectively hedge against the market risks.
