I'm far from a perfect investor. I've confessed various investing blunders over the years in hopes that others might profit from my mistakes. But a while had passed since I'd noticed a major error on my part ... until last week.
I was writing a check to send $4,000 to my IRA account. (You're saving for retirement via an IRA, right? If not, learn more in our useful IRA Center.) I knew there wasn't much in the account (at least compared to my main brokerage account), so I hadn't been keeping close tabs on it. Nevertheless, I knew I'd need to invest that $4,000 in something. I decided to peek into the account and see what was there. I figured that I might have a few hundred dollars left over from last year that I could invest, along with this year's contribution. I was wrong.
Much to my surprise, I found $4,000 already in my account, sitting there in cash. Within a week or so, the total would be $8,000 that I could invest. This sounds rather wonderful, does it not? And in many ways, it is. But here's the problem: That other $4,000 had been sitting there for a year. It could have been toiling away for me during all that time.
The job half-done
I'd been good and made my IRA contribution last year. I know that's more than many people do. Still, leaving the money uninvested isn't much better than stuffing it in a mattress.
One investment I wanted to make was in the Vanguard Emerging Markets Stock Index Fund (FUND:VEIEX). (I wrote about emerging markets a while ago, as did Doug Short.) If I'd invested in it last year, I'd be up about 45% today. My $4,000 would have turned into $5,800. (Be careful here, though -- don't make another one of my mistakes -- jumping into a fund just because it had a great year. Learn more first.)
Of course, a 45% return is far from what anyone should expect in any year from most investments, even stocks. During that same 12-month period, if I'd invested in a broad market index fund such as the S&P 500's Spiders (AMEX:SPY), my $4,000 would have appreciated by roughly 12%, gaining $480. Even in McDonald's (NYSE:MCD), which isn't exactly a high-flying fast-grower, my money would have gained 9%, or $360. So there you have it. I very likely left hundreds of dollars on the table.
Worse still, I lost out on many successive years of profits. If I'd gained $480 invested in Spiders, that $480 might have grown by, say, 10% per year, on average, over the next 20 years. If so, it would have become more than $3,200.
You might be thinking that had I invested in something that lost value over the year, I'd have lost money and wouldn't have written this article. Well, losing money is, of course, always a possibility. IBM (NYSE:IBM), for example, dropped by 9% over the period, while JetBlue (NASDAQ:JBLU) lost more than 15%. But my aim is to stay invested for many years and count on the historical long-term upward trend of our stock market to continue. As I see it, my job is to find suitable investments and invest in them. (This reminds me of an old joke where a man keeps praying to God every night to let him win the lottery. Finally, God speaks: "Meet me halfway -- buy a ticket!") If I had long-term confidence in IBM or JetBlue, I'd have been content to wait out the downturn.
Other jobs half-done
This mistake got me thinking about other jobs that I and others often leave unfinished. I thought about the two mutual fund account applications that are sitting on my desk. I've yet to fill out the forms and send in the checks. I haven't even gotten around to deciding for sure whether I want to invest in one or both of the funds I'm interested in.
My house and car are protected by insurance, but I secured those policies three years ago. I should make a few calls and see whether I can get a better deal elsewhere. I should also make sure that the policy terms still serve my needs. For example, is my home insurance going to pay me enough to rebuild my house in the event of a devastating fire, given the recent home-price appreciation in my area and the general increases in the cost of construction materials?
A friend of mine suffered some water damage in her condo many months ago. I don't think she's filed a claim with her insurance company yet. She, too, is leaving money on the table.
Many people out there have yet to start planning for their retirements. If they're thinking that everything will be all right, there's a good chance they're wrong.
Be smart about money
Make smart financial decisions today -- and follow through on them -- and you'll be thanking yourself profusely tomorrow. If you'd like some help with retirement planning, let me suggest my own favorite retirement information resource -- our Rule Your Retirement newsletter, edited by Robert Brokamp. You can try for free.
Here's a sampling of the useful information that has appeared in past issues of Rule Your Retirement:
- The April 2006 issue reviewed bonds and bond mutual funds, and it recommended some specific fixed-income investments.
- In the February 2006 issue, the newsletter covered the effects of inflation on one's retirement, along with tips on how to plan for it. The same issue also reviewed Joel Greenblatt's "magic formula" for investing, which has helped him achieve eye-popping average annual gains of 40% over 20 years.
- In the January 2006 issue, Robert tackled asset allocation and explained how we can "avoid Uncle Sam's grabby hands." He listed a host of popular investments, such as bonds and dividend-paying stocks, in order of tax efficiency.
- In the May 2005 issue, readers were taught how to withdraw money prudently in retirement, in order to make it last.
- The October 2005 issue delved into dividends and offered some recommended dividend-payers.
- The December 2005 issue covered Real Estate Investment Trusts (REITs) in detail and recommended some promising investments.
Here's to not leaving our financial tasks undone!
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Several funds in the Vanguard family have been recommended in the pages of Motley Fool Champion Funds. JetBlue is a Motley Fool Stock Advisor recommendation.
Selena Maranjian 's favorite discussion boards include Book Club , Eclectic Library, Television Banter, and Card & Board Games. She owns shares of the Vanguard Emerging Markets Stock Index Fund. For more about Selena, view her bio and her profile. You might also be interested in these books she has written or co-written: The Motley Fool Money Guide and The Motley Fool Investment Guide for Teens . The Motley Fool is Fools writing for Fools.
