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The key to success in retirement lies in having a plan that fits your situation. When generating your retirement plan, you may benefit from learning from some common retiree mistakes. In this article, we will discuss some of the most common retirement mistakes that we come across and how to avoid them.
Diversification refers to how broadly your portfolio invests across different asset classes and sub asset classes. If you’re investing in stocks, you should consider monitoring three different types of equity diversification in your retirement planning portfolio: Security-specific, sector and country diversification.
Security-Specific diversification. Many investors incorrectly believe they need to invest in funds—rather individual stocks or bonds—to diversify their assets. However, we believe most high-net-worth investors can properly diversify their portfolios using individual securities as long as you spread their risk across various sub-asset classes—such as sectors, countries, bond duration or company size.
Many investors understand the importance of not investing too heavily in one company, so they often elect to acquire their equity exposure through funds. Funds come in all shapes and sizes, whether they are actively managed mutual funds, Exchange Traded Funds (ETFs) or index funds. These can be great tools for investors with smaller portfolios to diversify themselves across various companies, but a common mistake we find is that investors tend to over-diversify their portfolios.
The average US mutual fund holds about 295 securities, so owning just 3 mutual funds means you could own the entire S&P 500 nearly two times over.[i] Owning so many stocks can make even matching the performance of the overall market difficult once fees are taken out. Individual stocks and bonds are often held in multiple funds, so if you hold many funds, this could lead to an un-intended over-concentration in certain securities.
Sector diversification. Stocks in the same or related sectors tend to have positive correlation—they often react similarly to one another. In 2000, technology stocks were bid up to overly-optimistic levels, only to come crashing down. In 2008, bank stocks were decimated. So while you might be diversified across various companies, you still may be over-concentrated in one sector, which may be risky.
How do you know if that is the case? One way is to compare your weight to the broader market by using a benchmark. An appropriate benchmark is necessary to measure relative risk, return and weights towards certain sectors, countries and other parameters. Don’t just find any index that matches what you happen to own. Rather, pick a broad market index and use it as a blueprint for portfolio construction.
Country diversification. Just as certain market sectors sometimes take a bigger hit than others, the same can be said for the markets of individual countries or regions. Diversifying your investments globally can help spread risk across continents, currencies and regions. However, like any other type of investing, country diversification comes with risks.
Foreign political systems and regulations may operate differently from those in the U.S. Other risk factors to consider include currencies and taxes. Foreign exchange rates vary and can experience periods of volatility, which can affect stock market performance. Foreign tax rates can also change as economic and political changes occur in individual countries.
One of the bigger mistakes we see investors make is underestimating their investment time horizon—how long their portfolio will need to provide for them. Investors often think of time horizon as the time until they retire. They save as much money as they can in their retirement accounts until the day they retire with the intention of growing their nest egg. But their investment time horizon doesn’t end on the day you retire.
With rapid advances in health care, people are living longer today than decades ago. That means your money may need to last longer. A longer investment time horizon may mean planning for things like long-term care for you or a spouse.
Depending on your cash-flow needs and return objectives, you may need to plan for more growth over a longer investment time horizon, which may mean accepting additional volatility. Increased short-term volatility—commonly from stock exposure—can allow for increased returns over the long term. And overly conservative portfolios may not provide enough long-term growth to support your cash flows and counter inflation. With rising health care costs, you may also need to anticipate additional health-related expenses.
It’s common for retirees to overlook exactly how they will generate cash flows in retirement. After being told their entire life to save as much as possible, it may be difficult to determine how to generate necessary retirement cash flows. While Social Security is one thing retirees can use to help develop an income stream, you may need more regular income to maintain your current lifestyle. We recommend estimating how much your retirement lifestyle will cost before determining how you will pay for it.
Once you have estimated how much your retirement lifestyle will cost, you should calculate any income you will receive outside of your investment portfolio. Some of the most common sources of non-investment income include:
Once you’ve accounted for these sources, you can fill in the gaps by deciding how to take income and cash flows from your investment and retirement accounts.
An ideal retirement plan requires sticking with a long-term strategy that is best suited to help you meet your long-term investment goals. That often means staying disciplined in volatile times. Powerful emotions such as fear and greed drive many investors to make ill-timed trades in and out of the market.
If you have a decades-long investment time horizon, you can likely expect to go through both rising and falling markets. If your long-term strategy calls for stock exposure, reacting by getting out of stocks at the first sign of negative volatility could be a recipe for disaster. If you’re wrong, you could miss out on some of the subsequent bull-market returns!
After stock prices have fallen, investors who suffered losses may consider abandoning stocks. But if their long-term investing goals required growth, their chances of meeting their goals in retirement may dwindle if they invest too conservatively. Don’t let one big bear market like 2008 scare you out of stocks for good. Remember, stocks’ long-term returns of about 10% annually include every bump and down market.[ii] Investors who are able to weather the volatility for the long-term returns have a better chance of achieving the long-term growth they need.
Effective retirement planning takes discipline and time. Fisher Investments can help you craft an appropriate portfolio strategy and avoid common retirement mistakes. If you have any questions on any of the retirement mistakes covered in this article or would like to learn more, contact us to speak with one of our qualified representatives today. You can also download our guides The Eight Biggest Mistakes Investors Make or 13 Retirement Blunders to Avoid to learn about other common missteps.
[i] Source: Morningstar, as of 12/04/2018.
[ii] Source: Global Financial Data, as of 01/18/2019. Based on 9.9% annualized S&P 500 Index total returns from 1927–2018.