In the highly competitive 32-team NFL, clubs have to be nearly perfect to earn a shot at pro football's biggest prize -- a Super Bowl championship. The New England Patriots, who have been the odds-on favorite to win the Super Bowl for months, have been about as perfect as a team can get, having wrapped up a perfect 16-0 regular season with a win against the New York Giants on Saturday night.
Luckily, investing for retirement is a lot easier. You don't have to find the perfect investments to save enough for a comfortable retirement. In fact, over the long run, the markets tend to be quite forgiving of investing mistakes -- as long as you learn from those mistakes. Here are a few ways in which people fall short of perfection, and what those mistakes can teach you.
Mistake No. 1: Taking a big loss in your portfolio
Even Tom Brady throws interceptions. So if you invest in individual stocks, you'll inevitably have a few big losers. Memory-maker Micron Technology (NYSE:MU), for instance, looked like a decent bet last year, with Windows Vista coming out to encourage everyone to upgrade their computers. But when Vista launched with a whimper, Micron got pinched, and the stock's price got cut in half in 2007.
A star quarterback has to move past his mistakes -- and you have to learn to accept some losses in your portfolio. Just because you pick a stock whose price drops, that doesn't mean you're a terrible investor. Take a look at why you made the wrong call, and apply what you learn to your future picks.
Mistake No. 2: Shooting for the moon
Those 80-yard touchdown passes to Randy Moss are always spectacular. But sometimes, you have to grind out scoring drives a few yards at a time. Similarly, it's tempting to stake everything on stocks that could give you explosive returns -- even if a bunch of your picks end up flopping just as dramatically.
For instance, back in mid-2005, a look at the biotech sector might have revealed some promising prospects, including Myriad Genetics (NASDAQ:MYGN) and Encysive Pharmaceuticals (NASDAQ:ENCY). Yet while the two companies had similar stories two years ago, Myriad has risen more than 150%, while Encysive has fallen more than 90%. Granted, if you bought both, that's a great net return -- but you have to have a strong stomach to deal with big drops.
The good news is that you don't have to play a guessing game about which companies will crush the market. If you start early and save regularly, just matching the average stock return of 10% with an index fund will build you a nest egg that you can depend on.
Mistake No. 3: Counting on what's worked before
In football, no matter how well a certain play works, you can't just run it over and over again. You have to switch up your game plan.
Too many investors look to what's worked recently. But chasing performance is a losing proposition. For example, between 2003 and 2006, financial stocks JPMorgan Chase (NYSE:JPM) and Wells Fargo (NYSE:WFC) rose sharply as a favorable interest-rate environment, a great housing market, and a strong economy made conditions ideal for lenders. Yet if you bought just those stocks this year based only on that past performance, then you're looking at substantial losses right now.
Similarly, most asset classes cycle in and out of favor. International stocks have outperformed in recent years, but they didn't do nearly as well as U.S. stocks did during the late 1990s. Bonds have performed well this year, but their returns earlier this decade were mediocre.
As you plan for your retirement, don't worry about trying to do everything perfectly. You don't need to go 16-0 to enjoy your golden years with financial security.
For more on retiring successfully, read about ...
- What IRA blunder can destroy your retirement savings,
- How to make more from your mutual fund, and
- Where to find a better Medicare prescription-drug plan.
