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Doug Fabian is the president of Maverick Investing, a mutual fund investment newsletter service. Fabian also hosts Maverick Investing with Doug Fabian in Los Angeles, Chicago and more than 70 Business Talk Radio affiliates across the U.S. More information about Fabian’s newsletter is found at www.fabian.com. For a free issue of Doug Fabian’s Maverick Investor Newsletter just call 1-800-950-8765 or visit www.fabian.com. Mr. Fabian is not affiliated with, or compensated by, U.S. Global Investors, Inc. |
Be sure you’re not compromising your financial
future by falling into these common traps. When it comes to securing a long and comfortable retirement, you can’t get much better than an employer-sponsored 401(k) plan. With yearly contributions of up to $10,500 and a range of investment options, you can amass a sizeable amount during your working career. So what’s the problem? I’ve discovered that too many investors aren’t properly utilizing these vehicles. Through a combination of misunderstanding, misinformation and just plain bad advice, too many employees are compromising their financial futures by making one of five common 401(k) mistakes. Mistake #1. Not investing in the plan at all It’s easy to get caught up in our day-to-day finances. There’s rent or mortgages, property taxes, car loans, children’s activities and schooling, groceries, utilities etc. So, when a new employer asks about contributing to a 401(k), many of us think that we can’t afford to. Remember, starting with a minimum contribution, even 1% of your salary, is just a start. Once you see the value of your account grow, it’s easy to find more money from your paycheck to add. In addition, your 401(k) contributions are pre-tax, which means less reportable income for the taxman to latch onto. Plus, if your employer matches any amount of your contribution, you can’t afford not to contribute. Keep in mind that if your company puts in 50 cents for every dollar you add, you receive an automatic 50% return on your investment. Mistake #2. Taking 401(k) loans Just because you can do something, should you? When it comes to taking a 401(k) loan, the answer’s ‘no.’ I can’t tell you how often I’ve talked to an investor who did just that to buy a home. They had every inten-tion of paying the money back, but something always seemed to come up. They then ended up having to report the 401(k) loan as income and pay taxes on it, on top of the 10% early withdrawal penalty. If you anticipate needing a set amount of money in the near future, save it up in a taxable account. Once that money’s gone, you lose not only it, but any future growth on it as well. Mistake #3. Overinvesting in company stock I don’t care if you work for a startup Internet firm or a solid blue-chip company, there’s no reason to pin all of your financial dreams on just one stock. You’re already exposed to the company’s profitability through your salary and/or bonuses. If the firm does well, you will too. However, if the firm hits a rough patch, you could lose twice – not only with your job but also by holding a large percentage of a declining asset. I don’t recommend having more than 10% of your total portfolio in company stock. Mistake #4. Investing too conservatively Many investors are given the gift of tax-deferred growth in a company-matched 401(k) with great investment options. Know what they do then? They throw it away by investing in money markets, guaranteed investment contracts (GICs) or bond options. Let me remind you that this money is among your most important – it’s what you’re going to use to support yourself after you retire. Focusing on Quantity Instead of Quality Some investors think that by owning eight or 10 different funds, they are highly diversified. But they may not be diversified at all. The reason: funds with similar investment objectives often hold the same stocks. For example, if you own 10 aggressive growth funds, chances are your diversification is very limited because you’re only exposed to one area of the market. Without question, asset allocation decisions are a critical starting point for constructing a well-rounded portfolio. Mistake #5. Not asking for more options This is your retirement plan. Chances are if you’re unhappy with your 401(k) investment options (or lack thereof), so are your co-workers. Don’t settle for mediocrity. The 401(k) market is very competitive and there are a multitude of plans that would love your company’s business. |
