Most of us look forward to retirement but also worry about how much money we need to save for expenses we could incur in our golden years. With increasing life expectancies and rising medical costs, will you have enough money to cover medical expenses, such as long-term care? Since Social Security benefits may not be enough to cover all your expenses, you may need to rely on other sources of income, such as the investments in your retirement accounts or retirement plans.
As you plan for retirement, it’s worth considering and learning from some of the more common investing mistakes that retirees make. Often these mistakes begin with an aspiration or an idea that makes perfect sense in isolation. Here are a few of the mistakes we commonly see.
“Conservative” can suggest prudence, wisdom and a desire to avoid volatility. Investing conservatively may seem like the right way to go for some retirees for at least a portion of their portfolios. But if you take a closer look, having a conservative portfolio comes with its own risks.
For conservative investments, perhaps the biggest risk is that your asset allocation limits your portfolio’s potential growth. This can be especially problematic if you have a long investment time horizon and need your retirement savings to grow or at least keep pace with inflation to meet your long-term retirement goals.
Here are some investments commonly considered conservative:
It is human nature to want to sidestep negative volatility. But volatility, we like to say, is the price you pay for the historically high long-term return of stocks. Timing market corrections—short and typically sudden market downturns of 10 to 20%—can be incredibly difficult. Corrections are based on sentiment and can start without warning. They can also reverse just as quickly. So you could end up selling after stock prices have dropped and buying stocks again after prices have risen. If you try to avoid them you may be more likely to make costly mistakes.
Forecasting bear markets can also be difficult. We define bear markets as fundamentally-driven market downturns of about 20% or more over a sustained period. They are generally caused by weak economic corporate and economic fundamentals and tend to be slower moving than corrections. Trying to time the market during a bear can be done more easily since there is a fundamental cause, but it’s incredibly difficult. If you get out of the market without doing your research first, it might cause you to sell too early or buy back in too late, missing the subsequent rebound an crippling your returns.
Further, you may not need to sidestep bear markets or corrections in order to reach your long-term investing goals. Overall markets tend to go up more during bull markets than they go down during bear markets. Exhibit 1 shows that from 1927 to 2017 the S&P 500 has had many ups and downs, but the overall trend has been markedly positive.
Exhibit 1: S&P Index (1927-2017)
Source: Global Financial Data, as of 2/7/2018; S&P 500 Price Level from 12/31/1927 – 12/31/2017.
As active money managers, we believe there are opportunities and market inefficiencies to take advantage of to help you reach your goals. But this requires discipline, research and knowing something others don’t. It also requires a dedication to risk management to make sure we aren’t taking on outsized risk for our clients.
Many investors ignore international stocks and assume they can diversify by investing in US-based multinational companies. But we believe global investing presents opportunities, as US and non-US stocks perform differently. As Exhibit 2 shows, the two categories rotate leadership often.
Figure 2: US vs. non-US Stock Market Leadership
Source: FactSet, as of 1/2/2018. MSCI USA Total Return Index minus the MSCI World Ex-US Total Return Index from 12/31/1969–12/31/2017.
US stocks may lead or lag for several years, but often investors make the mistake of only investing in their home country because it is more familiar to them. We call this phenomenon home-country bias.
By owning both US and non-US stocks, you can further diversify away some country-specific risk and potentially smooth out your long-term returns. Investing in non-US stocks can also offer currency diversification. Currency exchange rates fluctuate frequently and can impact returns of both foreign and US stocks. By exposing your portfolio to different countries, you can lessen the impact of currency fluctuations.
Whether you have a few years before you retire or have already retired, these mistakes can be painful. Investing mistakes can be costly and jeopardize your retirement plan. Investing and retirement planning can also be emotionally challenging. The decisions you make can have a major impact on your financial future. If you’re interested in learning how Fisher Investments might be able to help you with retirement planning, then contact us or download one of our educational investing guides today.
[i] Source: Global Financial Data, Inc., as of 01/11/2019. US 10-Year Government Bond Index, S&P 500 Total Return Index, average rate of return for rolling 30-year periods from 12/31/1925 through 12/31/2018.