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The Secret Disasters in Your Portfolio

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I've got disaster on my mind today. Not because of the automakers' crisis, or anything else having to do with the markets. For me, right now, it's about the ice.

On Friday, nearly a million people in New England remained without power, thanks to a nasty ice storm. For those in warm climes, an "ice storm" is what we call it when rain freezes on the way down and coats everything with ice. It's actually lovely to look at… until the shimmery tree branches break under the ice's weight, taking out power and telephone lines. And until you realize that the roads are glistening because they have a half-inch of hard icy glaze on them.

Our power is on, but many of our friends are in the dark. One couple thought they were prepared -- they had an excellent Honda generator stashed in the basement -- but they couldn't get it started today. It was full of gasoline… but that gas had been sitting in the tank for two years, untouched.

You may not know this about gasoline: It goes bad. It breaks down over time, leaving resins that can gum up the little tiny passages in fuel-intake systems. Gas for things like that generator should be stored in a separate container and renewed every couple of months, or preserved with a fuel stabilizer, or both. 

Long story short: My friends thought they were prepared for disaster, but they were undone by a seemingly small thing they'd overlooked.

Those little things can really get you.

The worst retirement investing mistakes
Just like leaving the gas in the generator, investment decisions or omissions that seem small can hurt badly later on. Here are three common examples:

Putting your "emergency fund" in stocks
Even for many who were disciplined enough to accumulate an emergency fund big enough to cover six months' expenses (that's a big emergency fund), it was hard to leave it just sitting there in a money market fund earning 2%. Sliding it over into, say, an S&P 500 index fund seemed like a good way to boost the returns… it wasn't really that much more risky, was it? It's not like they were buying Loopnet (Nasdaq: LOOP  ) or Ikanos (Nasdaq: IKAN  ) at their go-go peaks, after all. But now, they have an emergency fund that'll cover only three months' expenses.

And those who started with less? They now have … less, just as the recession is taking hold and millions of jobs are at risk. Not good. Stocks are great long-term investments, but if there's a good chance you'll need the money within a year -- something you should always assume to be true with an emergency fund -- it should be in something more stable, period.

Failing to reinvest dividends
International Paper (NYSE: IP  ) is sporting a dividend yield around 8% right now. Stash something like that in your IRA, and reinvest those dividends over 20 years, and you're likely to enjoy some very significant growth … unless you forget to tell your brokerage firm to reinvest the dividends. In that case, you'll have growth that's likely to lag the markets -- and a smallish pile of cash, which won't be enough to fund your retirement.

Usually, electing reinvestment is just a matter of checking a box on a Web form. But under some circumstances, your brokerage may default to not reinvesting. You don't want to miss that when you're taking advantage of the down market to add something like Kraft Foods (NYSE: KFT  ) or Ingersoll-Rand (NYSE: IR  ) to your long-term holdings. Check to be sure, and if in doubt, call your brokerage's toll-free number and ask -- right now.

Buying your employer's stock
An awful lot of people still think that holding their employer's stock in their retirement accounts is an important show of loyalty, or just a good investment. Not good, for two reasons. First, even the strongest stocks hit rough patches.

Look at General Electric (NYSE: GE  ) , for years regarded as the blue chip of American blue chips. It opened 2008 near $40, but it's now trading around $17. Dow Chemical (NYSE: DOW  ) , another perennial heavyweight, is similarly down to $20 from a high near $43 this past spring. If you're six months from retirement, holding most of your assets in your company's stock when it hits a similar rough patch, how's that going to work out? 

Second, and maybe more importantly, your total financial picture is already heavily exposed to your employer's fortunes -- you work there! If your company hits the skids and you get laid off, you can take some comfort in having your 401(k) to fall back on if things get really tight -- but if it's in your employer's stock, your last-ditch reserves may have been ditched as well. We all know how important diversification is -- make sure you diversify this risk as well.

To learn more about avoiding common retirement-investing mistakes:

Worried about retirement investing in this difficult market? The Fool's Rule Your Retirement service can help you find ways to preserve, grow, and manage your retirement nest egg, no matter your situation. Try it free for 30 days, with no obligation.

Fool contributor John Rosevear has no position in the companies mentioned. Ikanos is a Motley Fool Hidden Gems Pay Dirt selection. LoopNet is a Motley Fool Hidden Gems and Rule Breakers recommendation. Kraft Foods, International Paper, and Dow Chemical are Income Investor picks. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.

Read/Post Comments (2) | Recommend This Article (13)

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 December 15, 2008, at 7:40 PM, hsvhughes wrote:

    Classical investors did not cause the current stock market turmoil. Traders, speculators, and dishonest "managers" selling risky derivatives dressed up in AAA costume to did it all on their own. The typical 401K investor, like me, has a full-time job and does not have time to "play the market". Capitalism is getting a bad name around the world because of greedy crooks wanting money for noth'n and chicks for free. We need a remedy that none of the "players" want. For just a moment, take off your "player" hat and think logically about what got us in this mess, and you will realize what must be done. Think about what the stock market was originally set up for and you will get a clue.

  • Report this Comment On December 28, 2008, at 9:33 PM, Slipswitch wrote:

    I bought LOOP at it's peak. It was a Hidden Gems recommendation - 2 times.

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