When it comes to money and investing, people can be prone to irrational behavior. Case in point: In order to achieve gains and avoid market losses, investors often jump from investment to investment and "buy high," which is exactly the opposite of what they should be doing as part of an overall strategy to receive the most consistent long-term results.
You might think you're doing yourself a favor by chasing hot stocks, but this, along with other bad behaviors, can potentially destroy your long-term efforts at saving for retirement. How else could you be doing more harm than good? Let's take a look.
Investing too conservatively
Recent studies indicate that millennials -- roughly defined as those born in 1980 or later -- invest more conservatively than older investors. A survey released by UBS this year showed millennials held more than half their assets in cash across all investing accounts -- more than double the cash allocations of other generations. This is likely a result of experiencing firsthand the Great Recession and watching their parents take the brunt of stock market losses and eroding home values.
What to do instead: If you fall into this category, remember you have a powerful ally in the retirement-savings game: time. Further, you should know that historically, the stock market shows an overall upward trajectory, despite any dips and dives it may take along the way.
To take full advantage of the long time you have before retirement, you need a relatively aggressive mix of stocks and bonds, which will have the potential for far higher returns than a simple savings account. While this strategy comes with increased risk, your long time horizon means you have more opportunity to recoup whatever losses you may incur.
For your 401(k) plan -- or whatever retirement plan you're offered at work -- even a one-size-fits-all target-date fund is a better choice than cash. But for a more customized recommendation, look to free in-plan advice offered through your employer or 401(k) plan administrator. Advisory services can help you pick the right funds and the right percentage to invest in each to best support your retirement goals. They can also help you stay on track when the market takes a detour.
Not paying yourself first
An education is among the most solid investments one can make, but the cost of attending college is going nowhere but up. It's more important than ever to start saving for your child's college education in advance, but too often parents are faced with competing priorities: their own retirement and their child's education. How can you avoid putting yourself second?
What to do instead: It may seem harsh, but funding your retirement has to be your No. 1 priority. After all, your children can take advantage of grants, loans, scholarships, and work-study programs to fund their college education. There are no such options for your own retirement. But if helping your kids bridge the tuition-funding gap is what you want to focus on, be sure to take advantage of the myriad available resources and savings tools that can help you accomplish your goal.
For example, there are plenty of college savings plans, including a 529 plan, a Coverdell Education Savings Account, or a custodial account. In addition, tax credits and deductions -- such as the American Opportunity Credit and tuition and fees deductions -- can help offset college costs by reducing the amount of income tax you have to pay. Whatever you do, stay on course toward your own secure future as much as you can.
Getting out of the market too early
A traditional investing rule has been to subtract your age from 100 and use the result as the percentage of your portfolio that you should allocate to stocks. This means that as you approach retirement, you'll move away from equities and start investing more in bonds in order to reduce your overall risk. But increasing lifespans means that some of us could spend more than 35 years in retirement, and when older investors invest too conservatively, they risk outliving their savings.
What to do instead: A more recent recommendation is to subtract your age from 110 or 120, but that may not be appropriate for everyone. The bottom line is that if you need to make your money last longer, you'll need the extra growth potential from continuing to invest in stocks.
Different generations face different hurdles when it comes to investing and saving for retirement. But despite your good intentions, your actions may not help you get where you want to be. If you find yourself going astray, enlist the help of a qualified investment advisor who can help clear the path to a secure financial future.
Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.