Many folks are now confronting a hard truth: Thanks to Mr. Market's recent fits of despair, their long-cherished hopes for retirement are in danger of remaining nothing more than hopes. But as with all unanticipated disasters, it's all about how you react.
With the benefit of hindsight, was your asset allocation maybe a little bit too aggressive? Was your portfolio overly dependent on the fortunes of a few companies?
Making the most of what you've got left will require frank answers to these questions, and smart actions going forward. Unfortunately, history suggests that many folks will fail to learn from their mistakes, and even worse, will fail to do the things they need to do to take maximum advantage of whatever Mr. Market gives us in the coming years.
Don't be that guy
You don't want to be one of those folks. If you want to keep from adding insult to injury, avoiding these all-too-common mistakes will give you a solid head start on regaining that lost ground.
1. Failing to have the right plan.
This is actually two mistakes rolled together. I won't rehash the reasons you need an asset allocation plan here, except to say that it's the best way to maximize your potential for returns while staying within a given level of risk.
Just buying "whatever looks good" isn't an asset allocation strategy. Consider: If buying "whatever looked good" to you two years ago had led to a portfolio full of financial companies like Goldman Sachs
Of course -- this is the second mistake -- if the level of risk in your chosen asset allocation is wrong for your time horizon or your stomach acid levels, that's also a mistake. I have heard of a few folks in their 60s who were heavily invested in aggressive stocks like Mueller Water Products
2. Failing to diversify.
Investing heavily in your employer's stock seems like a great idea -- after all, you know as much about how the company is doing as anyone, right? But imagine being a Sun Microsystems
If you step back and look at the whole of your financial life as one big asset-allocation picture, you'll see that you're already heavily exposed to your employer's prospects just by working there. Holding more than a token amount of company stock is a risk that most folks just shouldn't take. Get that asset allocation plan and use it to spread the risk around in a way that makes sense.
3. Leaving money on the table
If your employer still offers a matching contribution in your 401(k), I hope you're contributing enough to collect it all -- that's free money. But that's not the only place you might be leaving money on the table. The U.S. government gives us several different tax-advantaged ways to save for retirement, and failing to put them to good use is like leaving more free money behind.
If you're not contributing to your IRA every year, consider stepping it up -- either via a lump sum or by making periodic investments. Most brokerage firms will be quite happy (trust me on this one) to set up a recurring automatic IRA contribution from your bank or brokerage account. A couple hundred bucks out of every paycheck is a lot less onerous than coming up with $5,000 every winter, and if you automate it you don't even have to think about it.
One final note
Last but not least, stay on top of this stuff. If you're sitting in cash, now is the time to start thinking about how you're going to reinvest it. If you haven't made any changes in recent months, now is the time to move from the portfolio you have -- whatever it is -- to the portfolio that will best serve your interests going forward.
If all that sounds overwhelming, you could hire an advisor to help you sort it out -- but if you're already worried about spending, that might not be the best way to go. As a middle ground, consider taking a free trial of the Fool's Rule Your Retirement service. Between its extensive archive of articles and its members-only discussion board, Rule Your Retirement is designed to answer just about any retirement-investing question you might have. And about that asset allocation plan? Their model portfolios are an excellent place to start.
A 30-day trial gives you full access, costs nothing, and comes with absolutely no hidden fees or obligations to subscribe. Click here to get started.
Fool contributor John Rosevear has no position in the companies mentioned. Nam Tai Electronics is a Motley Fool Global Gains recommendation. Try any of our Foolish newsletters free for 30 days. The Motley Fool has a disclosure policy.
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