Investing can be daunting for many people. In fact, only 55% of Americans have money invested in the stock market, a recent Gallup poll found, a percentage that has remained steady every year since 2010.
Although many Americans are wary of the market, it's one of the best ways to build wealth, especially in preparing for retirement. You'll likely need to have several hundred thousands of dollars (or more) saved to enjoy retirement comfortably, and unless you have loads of spare cash lying around, it'll be tough to save that much without investing.
Simply throwing your money into the stock market without a strategy, however, can be dangerous. To grow your retirement savings as much as possible, it's crucial to avoid these three expensive investing mistakes.
1. Not diversifying your portfolio properly
The old saying about eggs and baskets holds true when investing, and it's crucial to ensure you're spreading your money across enough investments to limit your risk. If you throw all your cash into a single stock, and that company takes a turn for the worse, you'll be in a tough spot.
If you're buying individual stocks, aim to invest in at least 10 to 15 solid companies to reduce your risk. Or you may choose index funds or mutual funds, which will allow you to invest in dozens or even hundreds of stocks at once. To diversify as much as possible, you might invest in multiple index or mutual funds, spreading your cash across thousands of stocks.
2. Investing too aggressively or conservatively
Your portfolio will likely contain a mix of stocks and bonds. An aggressive approach to investing involves allocating the majority of your portfolio toward stocks, while a conservative approach means investing more in bonds.
How aggressively or conservatively you should be depends largely on your age and your tolerance for risk. In general, the closer you are to retirement, the more conservative your portfolio should be. Your savings won't grow as much if you're investing heavily in bonds, but they will be more protected against potential stock market downturns. If you're only a year or two away from retirement and are investing too aggressively, a market crash could devastate your savings.
On the flip side of the coin, it's also important to avoid investing too conservatively. If you still have plenty of time left before retirement, it's wise to invest heavily in stocks. They carry more risk than bonds, but they also boast higher rates of return. So although your investments may see more ups and downs over the years, your savings will also grow faster than if you were investing too conservatively.
One rule of thumb to determine how much you should invest in stocks versus bonds is the rule of 110, which states that your age subtracted from 110 is the percentage of your portfolio that should be invested in stocks. So if you're, say, 40 years old, subtract that from 110 and you should be investing 70% of your portfolio in stocks and 30% in bonds.
3. Trying to time the market
Timing the market involves selling your investments just before stock prices fall, then buying again when prices are at their lowest point. It sounds like a good investment strategy on paper, but in practice, it's nearly impossible to pull off.
The stock market is unpredictable, and even the experts sometimes have trouble explaining why it behaves the way that it does. Case in point: Despite being in the middle of a global pandemic and a recession, the stock market has been flourishing recently.
Instead of trying to predict the unpredictable, a better strategy is to invest for the long term. Ensure that your investments are diversified and that you're investing appropriately for your age and risk tolerance, then leave your money alone for as long as possible. Your investments may take a hit in the short term if the market falls, but they should bounce back given enough time. By riding out the storm, you can avoid the risk (and the stress) of trying to buy or sell at the exact right moment.
Saving for retirement can be challenging, but investing in the stock market can make it easier to build a healthy nest egg. And by avoiding these three blunders, you'll be well on your way to enjoying a more comfortable retirement.