Don’t Miss Out
Survey after survey shows that women are less confident about making wise financial decisions despite feeling more financially secure, that we're more likely to defer to a partner in making important money decisions and that some of us have no interest at all in learning how to invest in the stock market. Where does all this hesitation come from? Ask many women, and they’ll say it stems from a fear that they’ll make mistakes that could cost them. The irony is that this very fear could lead to some of the biggest mistakes of all.
Want to make sure your money is working as hard as you are? Check out these common — and potentially costly — mistakes you may be making on your investments, and what you can do to fix them.
Waiting Until You Fully Understand Investing to Start
Uncertainty and self-doubt are natural reactions to anything new. However, don’t let those feelings keep you standing on the investing sidelines. “The reality is that in the early years, the fact that you save is far more important than how it’s invested,” says financial planner Michael Kitces, who blogs at Nerd’s Eye View. “With something like a $10,000 account balance, another 1 percent or 2 percent of returns is only another $100 or $200 a year, while being able to save another $100 a month, or $1,200 a year, has a much greater impact in the long run.” The takeaway message: Just get started. You’ll learn as you go along.
Sticking With Your Default 401(k) Contributions
Automatic enrollment has definitely increased participation in 401(k) and other workplace retirement plans. According to a study released last year by the Center for Retirement Research at Boston College, participation averages 77 percent at plans with auto-enrollment compared to 67 percent for plans that require workers to opt in.
On average, though, the default contribution rate is just 3.4 percent, the study found. That’s below the contribution rate needed to get the maximum match (which was 5.1 percent) and far below what’s needed for a comfortable retirement. “The rule of thumb is save at least 15 percent of your salary each year which can include any employer match,” said Christine Fahlund, vice president and senior financial planner at T. Rowe Price. “We also suggest that if you are not saving that much, try increasing your percentage 1 or 2 percent each year so the increase happens gradually and you don’t really feel it.”
Taking Too Little Risk
Another problem with the default investment options in a 401(k) is that they’re often too conservative. Plans with automatic enrollment often drop workers into money markets — the option with the least risk and lowest return. Women, too, often default to low-risk options.
“Women, in attempting to be savvy, prudent managers of their investment capital, sometimes won’t invest. They save it,” said Sheryl Garrett, founder of the Garrett Planning Network of fee-only financial advisors. “Some savings may be very warranted. However, not investing over the long-term is a big mistake."
Workers need to keep the vast majority of their retirement accounts invested in stocks if they want to outpace inflation and have a comfortable retirement, Fahlund said. Savers in their 20s and 30s should have 90 to 100 percent of their accounts in stocks, while those in their 40s should have 80 to 100 percent and those in their 50s 60 to 80 percent.
“Longevity is still a women’s issue,” said Fahlund, noting that women typically live longer than men and so need their nest eggs to last longer. “This means women need to consider being on the high end of the range, not the low end, to benefit from the growth potential equities offer.”
Paying Too Much in Fees
The average mutual fund charged 1.25 percent in expenses last year, according to investment research firm Morningstar (login required). That’s down from a peak of 1.47 percent ten years earlier — but it’s also significantly more than the cheapest funds charge. Vanguard Total Stock Market Index Fund, for example, costs retail investors just .17 percent a year. If you can get access to the institutional version of the fund, say through your 401(k), the fee is just .07 percent.
You may think paying more gives you professional management that can boost your returns, but the reality is quite different. Actively-managed funds where managers try to beat the market typically miss the mark and underperform index funds that simply try to match market returns.
What paying more actually does is harm your returns, and shrink the size of your future nest egg. Over the long term, the money saved by investing in a fund charging .17 percent versus a similarly composed fund charging 1.25 percent could add up to tens — even hundreds — of thousands of dollars.
Obsessing About Stock Market Moves
The people who panicked and sold as the stock market tumbled in 2008 and 2009 thought they were doing the right thing; they were trying to avoid future losses. What they actually did was lock in their losses — and they missed out on the subsequent rebound.
Attempting to avoid risk often leads to the biggest risk of all, which is not getting the returns you need for a comfortable future. Obsessing about every uptick and downturn of the market can lead investors to trade too much, and at exactly the wrong times.
A smart investor once told me that paying attention to the daily ups and downs of the stock market was like trying to listen to a symphony note by note. What matters is what happens over time. “Historically, equities have out-performed other asset classes over the long term,” Fahlund said. “And it is the long term that we need to be considering.”
Liz Weston is an award-winning journalist and author of several money books, including the best-selling “Your Credit Score.” She writes about personal finance. at her site AskLizWeston. You can like her on Facebook and follow her on Twitter.