3 Warning Signs That You Are Gambling With Your Retirement
In today’s volatile market, there are more and more investors that find themselves gambling with their own money. Everyday there is another news story talking about how a decision by JP Morgan can derail the stock market for that day, or how the IPO for Facebook was done incorrectly and there may be repercussions for Morgan Stanley. Now more than ever, investors feel lost in the investing world and they don’t even know that they are gambling with their future. Here are 3 warning signs that you are speculating and gambling with your own money:
1) Stock Picking - This common investing practice is solely based on the idea that you, your broker or some investment analyst on television knows in advance which stocks are going to do well in the future. In addition, investing in 4 to 5 individual companies is much more risky than owning a diversified portfolio. Diversified is a key word that is thrown around often in the investing world, but true diversification takes thousands of individual companies to achieve, not 4 or 5!
2) Market Timing - Fortune tellers come to mind when they think about this warning sign because people jump in or or pull out of the market because they think that now is the time. The problem with that is we don’t know where the market will be going the next day because it is random. Many prognosticators use different techniques that try to find patterns in how the market moves, but there are no trends that can be used in investing. At the same time, “buy and hold” is not enough either. You cannot simply buy stocks, bonds or mutual funds and then sit on them for 30 years. You have to “buy and rebalance” to make sure that the appropriate amounts of each asset category are intact. Without these proper amounts of asset categories, the risk of your investments soar through the roof!
3) Track-Record Investing - Investors today have become more educated on diversification in some ways and have seen that it is never a good idea to have all of your eggs in one basket. So, whether it is your 401k at work or your Roth ITA account, investors have started to add categories like small cap and international to their portfolio. The problem comes when they go to pick what mutual fund they should use for that. Investors simply look at the historical returns for that fund and assume that fund will continue to do this in the future. History has taught us that approximately 75% of mutual do not outperform the benchmark or gauge for its success. And the 25% that did that year will fail to outperform the benchmark the following year. The famous tag line at the bottom of every commercial or prospectus is “Past performance does not guarantee future results.” The mutual fund companies are telling you that they will not repeat this performance, yet their commercials and marketing want you to believe that they can!
Remember, market returns come from just that, the market. They don’t come from some investment broker on Wall Street or some mutual fund manager. The only thing you need is someone to teach you how to build a diversified portfolio and then help coach you through the investment process so that you can be a successful investor. Coaching is the key. Having someone coach you through the good time s bad especially the bad times is what leads to true peace of mind for you and your investments.