Recs

8

Don't Blow Your Retirement With One Mistake

I'm not saying the small sacrifices don't matter.

Yes, as everyone likes to point out, forgoing your daily cup of coffee at Fourbucks will help you save toward a comfortable retirement.

But too often, the benefits of those years of monk-like austerity are eliminated with a single bad decision. I'll show you using the latte metric -- that is, how many days of avoiding those $4 pick-me-ups it takes to equal one bowl of bad decision-making.

Example No. 1: Housing
This is the obvious example right now. Conventional wisdom says that buying a house beats renting, because you build equity and get tax benefits on your mortgage interest. But as with any investment, price matters.

And prices got detached from underlying value in a major way during the run-up. Those who took on conventional mortgages with monthly payments they could afford can wait out the storm. Unfortunately, those faced with refinancing teaser rates they could barely afford don't have that luxury.

To calculate the cost of a housing mistake, let's assume someone bought a $400,000 house, and the house's value dropped 10% (the latest numbers show average housing prices have fallen 16.3% year over year). That's negative equity of $40,000, or 10,000 days of lattes. You'd have to skip that pick-me-up for 27 years to make up for this one. Yikes!

Example No. 2: Stocks
Despite the rough year, we Fools still love stocks. But not taking the time to properly research your options can lead to a lot of lost lattes.

Let's file this example under, "If you can't beat the index, invest in it." We'll compare the results of investing $10,000 a year ago.

Stock or Index

What Was $10,000 Is Now

Lost Lattes

S&P 500

$7,379

     655

American Eagle Outfitters (NYSE: AEO  )

$5,906

    1,024

Red Robin (Nasdaq: RRGB  )

$5,450

    1,138

General Electric (NYSE: GE  )

$5,401

    1,150

Chipotle (NYSE: CMG  )

$4,354

    1,412

National City (NYSE: NCC  )

$1,474

    2,132

Did I cherry-pick some of these to prove my point? Well, yeah. If you had bought JPMorgan Chase (NYSE: JPM  ) instead of National City, you’d be sitting on a small gain. Same with Procter & Gamble (NYSE: PG  ) versus General Electric.

Let’s be clear. I’m not trying to pick on anyone with perfect hindsight; I own American Eagle and Chipotle shares myself. And in the long run, these losses may not signify investing mistakes -- just short-term volatility in a down market.

Still, the important takeaway is how much everyday scrimping and saving you have to do to make up for an investing mistake. Taking three months to comparison-shop for a refrigerator and 30 minutes to buy shares in a company is self-defeating -- and it deprives you of many years of caffeine. The table above also underscores the importance of holding a diversified portfolio, so that one bad stock won't ruin your retirement. Motley Fool retirement expert Robert Brokamp says a good rule of thumb is to hold no more than 10% of your net worth in a single stock.

If you'd like help avoiding big financial mistakes, Robert and his Rule Your Retirement service can help. It covers a range of retirement topics, from proper portfolio diversification to avoiding tax pitfalls to specific stock and fund recommendations. Click here for a 30-day free trial -- there's no obligation to subscribe.

This article was first published June 19, 2008. It has been updated.

Anand Chokkavelu drinks decaf Iced Cafe Americanos ... he just likes the taste. He owns stock in American Eagle and Chipotle. American Eagle is a Motley Fool Stock Advisor recommendation. Chipotle is a Motley Fool Hidden Gems and Rule Breakers recommendation. JPMorgan is an Income Investor recommendation. The Motley Fool owns shares of American Eagle. The Fool has a disclosure policy.


Read/Post Comments (2) | Recommend This Article (8)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 07, 2008, at 3:41 PM, gollygeewhizz wrote:

    Well, when it comes to an I-told-you-so" rant with full 20-20 hindsight, I think you win the award. Enjoy! All this column is saying is that if an investor put his money into things that went went up he was a good investor. If he put money into things that went down, he's a bad investor.

    Thanks for the insight!

  • Report this Comment On July 09, 2012, at 8:29 PM, maazzoo69 wrote:

    Great points!

    -The importance of holding a diversified portfolio, so that one bad stock won't ruin your retirement.

    Motley Fool retirement expert Robert Brokamp says a good rule of thumb is to hold -- no more than -- 10% of your net worth in a single stock.

    Thanks!

    Maazzoo

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Anand is the Editorial Director of Fool.com. He loves pithiness, clever turns of phrase, and analyzing the banking sector.

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