Five Ways to Put a Serious Dent in Your Retirement Savings
I’ve been in the investment industry 25 years now (yikes where did the time go?!) and I’ve seen all kinds of ways people destroy their hard-earned savings. Here are just five.
1. Abandon your investment plan at the wrong time – I have seen this over and over. Clients want high returns but can’t stomach the volatility of high returning assets. They start out gung-ho and then markets throw them a curve ball and drop 25%. The plan goes out the window and the call to sell everything comes in. A well diversified portfolio will always have positions that aren’t working. Don’t abandon the positions that aren’t in favour for the ones that are – that’s selling low and buying high. Have a prudent investment plan and stick with it.
2. It’s too good to be true. See that ad for 15% no risk returns in mortgages? Sign me up! Who doesn’t want 15% per year with no risk! Use common sense, if there was a 15% no risk return, we all would be in it. When the promised returns are high, the risk is high as well. There is nothing wrong with reaching for a higher return with a small portion of your portfolio. But I have seen clients invest way too much in supposed high returning assets and then have things go wrong. Just ask the Fortress Mortgage investors out there.
3. Investing based on stock tips. So, your brother-in-law passes on a hot tip at a party, this baby is going to fly! Easy money. Ride it all the way to the bank! Stop! This isn’t investing, its gambling. What do you (or your brother-in-law) know about this company? Chances are the story you are being told is already fully priced into the stock. Don’t chase tips. Time and time again (and I have fallen for them myself!) I have seen this fade away to nothing. I still hold shares of a revolutionary energy fracking service company in my portfolio that are worthless just as a reminder to never chase tips.
4. Chase Fads – Crypto-currencies, cannabis stocks, 3D printers, you name it, there is always a current investment fad that sounds so compelling and promises instant riches. Don’t be fooled. Greed is a powerful motivator. There are no short cuts to long term wealth creation. Compound interest is the eight wonder of the world, but it takes time! By the time you or I have heard of the latest fad it will be fully priced in. Don’t chase it. I’m not saying don’t investigate it. Some of these might turn into something longer term but don’t make a serious allocation on the hopes for instant riches.
5. Overly Aggressive Leverage. Almost every serious problem I have seen in the investment business concerning leverage is due to being over-leveraged or holding excessively aggressive investments within a leveraged strategy. When you over-lever or are excessively aggressive, and things go sideways, you lose the power to stay the course and you can get taken out at the worst possible time. I am all for conservative leverage (think real estate), but the key word here is conservative. Once the debt starts to pile up things are almost always going to blow. Be very, very careful when it comes to using another person’s money.
These are just 5 of the many ways you can blow a real hole in your hard-earned savings. Don’t fall for them. Talk to your financial advisor, have a plan, and stick with it.