One of the least appreciated things in investing is the value of doing absolutely nothing. Too often, beginning investors believe that if they aren't doing something in their investment portfolios, then they're not going to produce the returns they need. It's easy to forget that once you set up a strong investment strategy, the ideal situation is one in which you can go for long periods of time without doing a single thing to change it.
But there's a difference between consciously choosing to take no further action and simply ignoring your investments. Although it's sometimes smart to take a step back from a turbulent market if it helps you avoid making knee-jerk emotional decisions that you'll later regret, too many investors make the mistake of thinking that they can simply let their portfolio go on autopilot indefinitely. Let's take a look at three of the most common ways that investors fail to make the most of their investments.
1. Failing to move retirement money.
Employer-sponsored retirement plans like 401(k)s are a blessing and a curse for American workers. On one hand, they give workers the best chance to save as much as possible in a tax-favored account that offers quicker growth for retirement savings. Yet on the other, many 401(k) plans earn criticism for charging hidden fees and other expenses that create such a huge drag on their returns that it almost wipes out the tax advantages of using the accounts in the first place.
In that light, one of the best things about switching jobs is that it gives you a chance to move past 401(k) money into a rollover IRA. Simply by contacting your favorite broker or financial institution and filling out some paperwork, you can usually arrange to have your old 401(k) automatically transferred to an account that gives you full control of your money, with a much wider range of available investments than you'll find in just about any 401(k) plan.
If you have money in an old 401(k), you should almost certainly move it. Only if you have a truly extraordinary plan or have special circumstances like ownership of employer stock does it make sense to keep your old 401(k) where it is.
2. Failing to rebalance.
One of the biggest tragedies of the 2008 market meltdown was the way in which it slashed the retirement accounts of so many people either already in or nearing retirement. In some cases, specialty target retirement funds that money managers Schwab (SCHW 4.88%), T. Rowe Price (TROW 0.84%), and Vanguard operated kept substantial allocations to stocks even as the funds' target dates approached, providing a much more aggressive investment strategy than many fund shareholders understood.
Yet much more common among investors was a failure to rebalance to keep risk levels down as the mid-2000s bull market reached its apex. In the heat of a big bull run, it's easy to let your winners ride without considering the potential downside. Yet by rebalancing, you lock in certain profits while buying beaten-down assets at discount prices -- just about the perfect strategy for anyone to follow. So after the current four-year bull market, check to see where your asset allocations are. If they're out of balance, make the shifts you need to keep your risk at appropriate levels.
3. Failing to pounce on opportunities.
Keeping a watchlist of stocks is incredibly important, because you never know when a rare opportunity to buy a stock might present itself. Countless times, temporary downturns offer great buying opportunities.
For instance, Netflix (NFLX +0.26%) shares collapsed after a series of missteps by the company in trying to reorganize to emphasize its fast-growing streaming business. But subsequent deals with media giants have underscored the huge value of the company, and those who got in after the worst of the selling was over have seen gains of more than 50%. Similarly, Green Mountain Coffee Roasters (GMCR +0.00%) suffered a big hit on a combination of accounting woes and patent concerns, but the stock has nearly doubled just since November after the holiday season once again proved that the company is far from a has-been in the space. Even SodaStream (SODA +0.00%), which has been criticized as a fad stock, has ridden a wave of potent growth to recover from its swoon back in 2011.
Obviously, just because a stock falls doesn't mean it's a good buy. Countless times, stocks have fallen because of fundamental problems from which they never recovered. Yet if you buy a fallen stock not on a whim but because you truly understand the business and have followed it for a while, then a share-price drop can be a massive opportunity you shouldn't miss.
Don't miss out
Doing nothing can be the smart move sometimes, but often, taking action is the right thing to do. By avoiding paralysis in these three crucial situations, you'll produce better results for your portfolio in the long run.
Tune in every Monday and Wednesday for Dan's columns on retirement, investing, and personal finance. You can follow him on Twitter @DanCaplinger.
