3 Don’ts of Investing3 min read • April 18, 2019
Success is often dependent on avoiding mistakes. Yet we often get so caught up in what we think we should do, we sometimes take our eye off of evading the bad moves that can undermine our long-term success.
Avoiding these three investing mistakes will help you reach your goals.
Mistake #1: Waiting to get started. The earlier you start saving for a long-term goal, the less of your own money you will need to invest, because you’re giving compounding more time to work its magic.
Let’s say you’re 30 years old and you commit to saving $500 a month for retirement, and you will earn an annualized 7% return. If you stick with that plan for 10 years, you will have more than $86,000 at age 40, and $1.3 million by age 70. If you instead wait until age 40 to get serious with the saving, that same $500 a month will get you to about $610,000 by the time you are 70. Just a 10 year difference in when you got started (during which you contribute $60,000) nets you a potential retirement pot that is more than double what you will have if you wait until age 40 to start saving.
Mistake #2: Reacting to the latest news, or office chatter. When you are investing for a long-term goal, such as retirement, a hands off approach will be a key to your success. Jack Bogle, the legendary founder of the Vanguard fund group who died this past winter, framed the goal as: “Don’t just do something. Stand there.” Bogle’s point was that staying the course and sticking to your strategy is the secret sauce of investing. That’s true when markets are on a tear and you think you should pile more in, and it’s even more important when stocks are getting slammed and you want to bail.
From 2000 through 2017 there were 5,217 days when the U.S. stock markets were open. If you were invested that entire time –just stand there–you earned an annualized return of 7.2% according to Morningstar Direct. But if you bailed out of stocks and managed to miss the 10 best trading days during that stretch –just 10 out of the 5,217 days – your return would have been just 3.5%.
3. Not being a fee fanatic. When you invest in mutual funds or exchange traded funds there is an embedded annual fee, called the annual expense ratio. You will never see a line-item in your statement telling you what the expense ratio for a given fund or ETF is. Rather, it’s a fee that is shaved off of the gross performance of a fund.
Some funds charge an annual expense ratio of 1.0% or more, others charge 0.10% or less. The biggest mistake you can make is to think that’s not a big difference. It’s huge!
Let’s say there are two funds that earn 7% before the expense ratio is deducted from performance. One fund charges a 1% expense ratio and the other 0.10%. If you started with a lump sum of $10,000 today, in 30 years the expensive fund will have grown to around $57,000. The $10,000 invested in the cheap fund will be worth around $74,000. You end up with a lot more money not because you took more risk, or your investment did better. You end up with a lot more money simply because you paid lower fees. If you are investing in a company retirement plan you are often limited to a lineup of funds available. Even so, you should be able to find low-cost funds —typically index portfolios. When you are investing on your own stick with a discount brokerage that has a solid “no transaction fee” lineup of funds and ETFs. That means you won’t owe a penny in commission when you buy or sell shares. The brokerage NTF lineups will include options that charge a low expense ratio.
Disclaimer: the content presented in this article are for informational purposes only, and is not, and must not be considered tax, investment, legal, accounting or financial planning advice, nor a recommendation as to a specific course of action. Investors should consult all available information, including fund prospectuses, and consult with appropriate tax, investment, accounting, legal, and accounting professionals, as appropriate, before making any investment or utilizing any financial planning strategy.