Imagine you lost $19,000 last year.
Did you buy Yahoo! (NASDAQ:YHOO) while shares were still in the $40s only to see them tumble into the $20s months later? Maybe. Did you purchase Encysive Pharmaceuticals (NASDAQ:ENCY), a risky biotech that exploded during the year? Eh, possibly.
I hate to admit it, but I also lost $19,000 last year. But it wasn't what I did that that cost me so much -- it was what I didn't do. Let me explain.
Mistake of the year
According to the Employee Benefit Research Institute, seven out of 10 workers contribute to some sort of retirement plan. And 45% of people contribute to a workplace plan.
Mark me down in that 30% who contributed nothing last year and that 55% who didn't contribute to a workplace plan. But I'm not here to air my regrets. I'm here because I bet there are more people like me thinking something like "I'm young -- forget retirement --give me the cash!"
But ...
With an employer that offers 50% matching contributions up to a certain level of my salary, not taking advantage of such a program ranks amongst 2006's biggest bonehead financial decisions.
Yes, Amaranth lost $6 billion last September, leveraged out the ears on natural gas bets -- that was stupid. But on a much smaller level, the prize was mine. In fact, the guys at Amaranth wouldn't squander a 50% gain that was just begging to be had.
An example for the people
Not taking advantage of this program was a significant blunder. And to illustrate the point, let's produce a basic example. According to the Profit Sharing Council of America, only 14% of workers are offered self-directed 401(k) plans -- so the majority of us are largely dealing with families of mutual funds.
To keep it simple, let's say we invested $5,000 in three highly rated mutual funds. Assume your company matches with a 50% contribution.
The Vanguard Energy (VGENX) fund has been a top performer over the past 10 years, with large holdings in stalwarts ExxonMobil (NYSE:XOM) and ConocoPhillips (NYSE:COP). Examine its performance:
|
Vanguard Energy |
Investment |
5-Year |
10-Year |
|---|---|---|---|
|
Without matching funds |
$5,000 |
$22,600 |
$25,600 |
|
With matching funds |
$7,500 |
$34,500 |
$38,400 |
Another top fund is T. Rowe Price Media & Telecom (PRMTX), which has done well by making large bets on stocks like Google (NASDAQ:GOOG).
|
T. Rowe Price Media & Telecom |
Investment |
5-Year |
10-Year |
|---|---|---|---|
|
Without matching funds |
$5,000 |
$18,500 |
$27,300 |
|
With matching funds |
$7,500 |
$27,800 |
$41,000 |
Lastly, how about a growth machine: The Kinetic Internet (WWWFX) fund has produced an amazing 22.5% 10-year trailing return. Kinetic Internet has made some great plays with selections like NYSE Euronext (NYSE:NYX) and Checkfree (NASDAQ:CKFR).
|
Kinetic Internet |
Investment |
5-Year |
10-Year |
|---|---|---|---|
|
Without matching funds |
$5,000 |
$11,500 |
$38,100 |
|
With matching funds |
$7,500 |
$17,200 |
$57,200 |
The real costs
I didn't actually lose $19,000 last year, per se. But look at that 10-year performance on the Kinetic Internet fund: On a $5,000 initial investment, $19,000 would have been the opportunity cost of not taking advantage of a simple and painless program and making sure my money was allocated into a great investment option. Even if I tossed the money on a lesser fund, I'd still be much better off.
Suffice it to say that for people who continue to make this mistake as they go on in their investing careers, the cost is far, far greater.
I'm not the only one
The blunder was a basic one -- remember, the majority (55%) of workers don't contribute to workplace plans. It's a blunder that can be easily remedied, however.
Quite simply: Enroll in your company's plan.
There are plenty of other mistakes out there -- and unfortunately, they're not always so easy to repair. But with careful preparation and discipline, you can control your own financial future. Get going by reading fund prospectuses and company 10-Ks and presentations. Never ignore the effect of free contributions, taxes, or trading costs. Keep your assets allocated properly.
Failing to keep these basic principles in mind is the surest way to stifle your natural investing potential.
To learn more about how to take advantage of all of the financial options available to you, take a look at the lessons offered in our Motley Fool Green Light service. A trial is free for 30 days, and there is no obligation to subscribe.
Fool analyst Nick Kapur does not own shares of any company mentioned above, though he will be fully taking advantage of contributions and other lucrative programs this tax year. Yahoo! is a Stock Advisor selection. Encysive and NYSE Euronext are Rule Breakers picks. The Fool has a disclosure policy.
