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.
