Did you happen to notice what the stock market did yesterday? Of course you did. It's nearly impossible to avoid the never ending stream of dire news about our economic slow down...er, recession...wait, depression? Whatever history will deem worthy for this economy, the question remains: What should you be doing with your retirement account to survive?Here are six mistakes to avoid with your retirement account...sprinkled with a dash of opportunity. Now is not the time to let your retirement statements remain unopened, stash money under the mattress and ride out the economic malaise. You only get one retirement, so the time to take action is now.
1. Quit Contributing: Most would argue that a lack of personal (and institutional) savings is at the core of this current financial mess. Without savings, we sustain our supplement our standard of living by borrowing, usually via credit cards and home equity lines. The plan is to pay that debt with future income increases or home appreciation since time is on your side. But when you’re retired, your future income potential is at best limited and probably non-existent. And we’ve all seen that counting on unlimited home appreciation is a bad idea. Unlike other business ventures we may engage in or entertain over the course of life, there’s no “recovery” from poor retirement planning since time is no longer on your side. Saving for your retirement should always be a priority, no matter what the condition of the economy. So continue to save as much as you can, especially if your employer offers matching funds. Why would anyone pass up free income?
2. Convert All Assets to Cash: As the market has gone from bull to bear to vulture, the natural instinct is to convert all of your retirement nest egg to cash to eliminate losses. While there’s merit in that approach for a short period of time, keeping your money in cash over the long haul is just another way to lose money. Assuming your custodian pays you a 1% - 2% return on your cash or money market account, your money will continue to rise year over year. But also assuming inflation will remain steady at 3% - 4%, you are “losing” money every year.
3. Un-diversified Portfolios: How many people had all of their retirement savings strictly in equities? Nearly 80% of all retirement assets were invested in mutual funds and stocks according to the Investment Company Institutes’ US Retirement Market report published in Q3 of last year. True diversification is NOT owning different stocks and mutual funds no matter what your brokerage tells you. True diversification involves spreading your retirement beyond equities to include investments in asset classes such as fixed-income, cash, commodities and real estate. A well diversified portfolio helps to reduce the risk of substantial losses in a range of economic conditions and provides steady, proven growth to your retirement account.
4. Ignore Opportunity: It’s very easy to get caught up in the hysteria of what’s happening each day to the stock market, our banking industry and key economic indicators. But don’t get so overwhelmed that you miss the opportunities around you. People are having a hard time borrowing money these days? Why not use your retirement account to make trust deed loans? Investors are using their IRA, 401(k) and pension plans right now to make loans to other investors, secured by real estate, that are producing double digit returns. People are having a hard time paying their property taxes? Why not use your retirement account to purchase tax liens? Investors are using their accounts to purchase tax liens at public auctions and again are making double digit returns on their retirement savings. Are these types of investments guaranteed to produce returns? No...no investment ever is. But the current market IS providing opportunity if you're willing to look beyond the headlines and the norm.
5. Go It Alone: Most individuals have a very passive attitude about their retirement account. They’ve historically trusted their “diversified” stock market portfolios to provide for them and now too overwhelmed with everyday responsibilities to find a way around the current mess. We’re all busy, but your retirement is your responsibility alone, so take control. You need to develop your own personal recovery plan that unfortunately will not involve any Federal bail out money. If you don’t have the desire or inclination to develop one on your own, there are professionals out there to help. Find a “fee based” certified financial planner or CPA that isn’t beholden to a singular financial institution and will design a diversified portfolio for you to help survive...and maybe even thrive...in this market.
6. Keep Everything In the Market: It will come back, right? Yes, it probably will. But when? Waiting for Wall Street to rescue you from the mess that it created is like trying to lose weight by switching from Quarter Pounders to Big Macs. You need to alter your behavior and build a stronger portfolio today, not once the market comes back. Don’t cash out of everything, but other investment classes are offering opportunity right now while the market continues to decline. There are plenty of self-directed custodians out there that offer a range of investment accounts that will allow you to take full advantage of ALL investments that are possible by the letter of the law. So don’t limit your personal recovery plan to the investments offered by your current retirement plan. There are options out there, it’s up to you to find them.
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