3 guaranteed ways to destroy your retirement

Retirement will always be a sensitive topic. With governments increasingly looking to shift pension and healthcare burdens back onto the individual, more and more people are getting active in taking control of their financial situation.

Unfortunately, while their intentions are good, their execution isn’t always up to par. Here are three ways you’re subtly (or not so subtly) undermining your retirement:

  • Trading too often

There are a number of potential risks with this strategy. For starters, you pay a transaction fee every time you trade. As an example, Australia’s most popular online broker charges $19.95 per trade up to $10,000 – which is a 0.2% fee on every trade. While that may not sound like much, multiply that by an average 12 or so stocks in your portfolio and the fees start to add up. Secondly, buying and selling too often increases the likelihood of you making wrong decisions.

Thirdly, you miss the gains that come with compounding growth from reinvesting dividends over time. Woolworths Limited (ASX: WOW) is up 335% since 1999 (far more if you reinvested your dividends), but its biggest gain in any single year is only around 20%. What’s more, if you’d held the stock since 2000, it’s now paying around a 10% dividend per annum – because dividends grew larger, but your buy price stayed the same.

  • Buying at the top, and selling at the bottom

This is another classic. Often, household investors come late to the party and put all of their money in shares once the market is full of excitement and close to its peak. The subsequent fall – like during the GFC – comes as a rude shock and short-term investors sell out at a loss. This is particularly dangerous because not only have they missed the gains on the way up, but they’ve sold at the bottom, and the experience has likely warned them off the stock market for good.

Some investors borrowed heavily to buy Rio Tinto Limited (ASX: RIO) at heights of around $130 during the GFC. Ultimately, they’ve never recovered their money.

  • Failing to contribute regularly

At The Motley Fool, the investment focus is on (length of) time in the market, not timing the market. Yet there is no question that investors who buy heavily into the market right at the top, like in the above example, can find it hard. Contributing regularly, regardless of market movements, is an effective way to mitigate this risk as you capture the gains on the way up, experience the falls (as well as the bargains) during any crash, and then benefit from the inevitable recovery.

  • Bonus point

Another big one is buying poor businesses. A quick look at  Origin Energy Ltd (ASX: ORG) over the past 10 years shows that despite big helpings of debt the company has been unable to generate any capital growth, unlike Woolworths, which has been able to reinvest in itself quite effectively.

Finding the biggest winners involves finding businesses that can reinvest in themselves effectively, generating proportionately greater profits every year. The same strategy was used very effectively by one man, who turned a modest $10,600 investment into an $8,016,867 fortune.

Learn more about this man and how you can start down the path toward financial independence. Simply click here to discover How 1 Man Turned $10K Into Over $8 Million

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Motley Fool contributor Sean O'Neill has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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