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Watch Out for These 5 Investing Mistakes! · Retirement Answers

• 0:01
  Jacob: So a plan that you create now while things are really good will help you stick to the same plan whenever things start to get bumpy. It's really hard to actually stick to the plan in the moment unless you have it written down and you know what your steps are gonna be when things are not going as well as you'd like them to. Welcome to Retirement Answers, a podcast built to answer your most pressing retirement questions. If you're someone who's either thinking about retirement or already in retirement, well, you're in the right place. Hey there, my name is Jacob Duke, and each week I'll be walking through different tips and strategies to help you succeed in retirement.
• 0:38
  So let's go ahead and get started with today's show. Hey friends, and welcome back to another episode of Retirement Answers. My name is Jacob Duke. I am your host as always. This week on the show, I wanted to walk through five investing mistakes that can ruin your retirement.
• 0:55
  Yep, these are things that I think are very important and things that I see come up all the time that people are making mistakes on. And I wanted to kind of give these to you so you can apply these to your situation to hopefully improve things so that you have a long and successful retirement and never run out of money. Now, the fifth one that I wanted to share with you today is something that is important to me and important right now, because it's something I see popping up on every portfolio review I've been doing lately as a big risk and it's across the board. So, we're gonna save that one for number five, but I wanna let you know that this is something I see 90% of the time as I'm evaluating portfolios over the last twelve months. Okay, so with that, let's go ahead and jump in.
• 1:33
  What is the first mistake that many people make when it comes to investing in retirement? And it is having too much cash. So being too conservative. And this is a hard one, right? Because as you get to retirement, this concern or this worry about not making income or not earning a paycheck and not being able to have positive cash flow coming into your checking account every single week, every two weeks, every month, whatever your pay schedule is, that could be very nerve wracking for a lot of people, right?
• 1:59
  Your whole life, you've been saving and you've been earning money because you went to work, and now you're no longer going to work, and now you're going to live off of the money you've saved and invested and accumulated over time. So the thought is there, whenever I get to that spot, I can't afford to lose money in my investments. That's the thought that a lot of people have. And so what that leads to is it leads to having a lot of cash or a lot of fixed income or money markets filled up. That way you don't lose money if the stock market goes down.
• 2:26
  So I'd understand the thought process, but here's the two risks that I can immediately think of. I'm sure there could be more, but the two main ones are gonna be the first one is inflation and the second one is longevity. So inflation risks. Well, we've seen over the last two to three years that inflation can be a really big thing and a very impactful thing. We've seen the cost of everything rise pretty dramatically over the last two to four years, ever since 2020 when COVID kind of came into the picture.
• 2:52
  And so what we've got is this idea of if we have too much cash starting, especially early in retirement, and we don't ever change that, what we could do is inflation could outpace our interest or earnings that we're gonna have on those cash holdings. So wherever you have a long retirement to plan for, let's say twenty plus years, having a bunch of cash on the sidelines is not helpful, right? Because you don't need all of your money today, you only need a portion of it today or this year or even next year for income purposes. And so having too much cash to avoid market volatility, it feels good to you in the short term, but what happens is you end up losing out greatly in the long term. Now, risk here of having too much cash in your portfolio is longevity risk.
• 3:33
  And that just means that you could outlive your money. So if you're not growing your money over time, which inflation will be going up and your cost of living will likely be going up and healthcare costs and whatever else that you might need in a later stage of retirement, as you continue to live longer, you could outpace or outlive your money. So if you're not investing it for X amount of years, let's say you lived in '95 or perhaps even a hundred. If you don't have money to spend at that point, whether it be for health costs or maybe you're actually really healthy and you enjoy spending money and going to and doing different things. If you don't have the money to outlive yourself, meaning you're not growing it over time, that becomes a big risk.
• 4:10
  So the risk of running out of money becomes greater the longer that you live if you're not investing that money properly. So the first investing mistake that could ruin your retirement is having too much cash and just being too conservative overall in your investment portfolio. And that can lead to inflation or you simply living too long becoming a big risk in the later stages of life. The second mistake I wanted to share with you is being too aggressive. So this is the flip side of having too much cash.
• 4:35
  It could be not having enough. Now, that doesn't sound like a common issue for many retirees. I feel like the first one, having too much cash, you're just getting really conservative is probably one of the more common things that people do in retirement. And you would be right, but there are many people who from a personality standpoint want to remain aggressive throughout retirement and maybe to their detriment. So what we've got here is we've got this balancing act.
• 4:56
  We've got to be aggressive enough, but not too aggressive. We don't want to be too conservative. We've got to have some put risk on the table by owning stocks or real estate or whatever it might appreciate in value, but does have volatility risk. We've got to be able to balance this out. And so the first two kind of go hand in hand.
• 5:12
  First one being you could have too much cash. The second one being too aggressive and not having enough cash. Now, what are the actual risks there of not having enough cash in your portfolio? Well, the first one is sequence of return risks. And that just means that you have to pull money out of your portfolio whenever they have a decreased value.
• 5:28
  So for example, if you have a 100% stock portfolio and that's gone down 30% in three months, and now you need to go pull income off of that to fund your retirement lifestyle, you're gonna sell those stock holdings at a loss in order to create income for yourself. And so that sequence of return risk, meaning you don't know when the ups or the downs or the volatility is gonna take place in your portfolio, but you still need income. Now, second one here is an emotional risk. Meaning if you see that the market or your account's gone down by twenty, thirty or 40%, that's a hard thing to withstand, especially going back to point number one, whenever you're not earning an income anymore. It might be easier to withstand that emotionally while you're earning an income and you understand, hey, I'm gonna earn some money, I'm still gonna invest, I'm gonna dollar cost average in every time I have a paycheck.
• 6:12
  But whenever you're not earning that paycheck and you think you can keep investing with the same aggressiveness or the same mindset, that could lead to you selling out of the market at the wrong time. And that becomes a huge risk, right? Because now you've sold at a loss, you've locked in those losses forever, and now you have to figure out when to get back in so you don't miss out on any recovery whenever that does begin to happen. So the second mistake that I see is being too aggressive and not having enough cash on the sidelines to fund your income requirements for at least two years. That's kind of the way I like to do this.
• 6:40
  I like to use a bucketing rule where I've got at least two years living expenses that I need to pull out of my portfolio. That's gonna be in cash. I'm gonna probably have more than that in fixed income such as treasuries, bonds, or CDs or something like that as well. But I wanna have at least two years living expenses in cash, that way we're not being too aggressive. So, you're gonna see here in a second, I'm gonna explain maybe some solutions to these different risks that help you apply these to your situation.
• 7:05
  The third mistake that I see all the time is market timing. And we know this in principle, we know we shouldn't do it, right? But the problem is, is we're human and we like to do things or think we're smarter than we really are. And so what are some of the reasons for market timing? Well, we might have a good feeling about something, we might have a hunch about, oh my goodness, it's gonna go down because of XYZ reason.
• 7:24
  Politics are often a topic of discussion here when market timing, especially in years like this one, where we have an election year coming up. And so, politics are a big part of the conversation because we have all these ideas around, you know, if X person becomes the president, that means that the stock market's gonna do great. Or if this other person becomes the president, that means it's gonna be terrible. And so we have these biases or preconceived notions that we have internally that we might probably don't recognize. And we think that we can make decisions or the market will react a certain way based on who is or isn't the president.
• 7:56
  We can also talk to friends or family or different people that have ideas or recommendations for us and like, oh, you know, go try this because I'm talking to the CEO of XYZ company the other day and they said they're about to do awesome. So go put some money in that. And that's a common thing that a lot of people hear or maybe mailbox talk with neighbors or whatever it might be. But one of the things that I often hear or have questions around from people is Jacob, the market's really high. It's gone up a lot.
• 8:19
  Is now still a good time to invest in the market? And my response to that is always gonna be, if you don't like how high the market is today, you're definitely not gonna like it in ten years. And I say that in jest, but the basis of it is true. The market has always gone up into the right, it's just a matter of when and by how much. And so we have definitely periods of time where it's not good.
• 8:39
  We've had oh eights, we've had really high inflationary moments. We've had great depressions. There's different things where we've had really great market declines and some of those have been extended. But at the end of the day, what we're betting on whenever we buy the stock market in The US or even around the world, we're betting on companies to sell their goods and services to us for a profit. And so we're not betting on political figures.
• 9:02
  We're not betting on different ideas or current market environments, we're betting on companies and we believe in those companies to continue staying in business and selling products and goods and services to us, that would be a good bet long term. Now you're gonna run into volatility, you're gonna run into periods where things are down in value simply because of current situations, but long term market timing is not gonna be the best way to make money. Now, I will give you this. You can definitely time things right. You can guess right every now and then, but here's the problem.
• 9:32
  As soon as you start making those guesses, you have to continue guessing right. So if you get out at the right time before the market decline happens, that means you've got to get in at the right time whenever the market starts going back up, and you got to get back out again before it goes down again, so you have to continue making these decisions in the cycle. And the problem is, is one wrong decision messes up the whole thing or all the money that you've perhaps made over the time of you doing this. So market timing, often we have really bad intuitions around when to buy or sell. So I say avoid it entirely.
• 10:02
  If And you do this wrong in retirement, it could mess up your entire retirement plan, perhaps making you run out of money faster, or perhaps even making you go back to work to make ends meet. So that's the third mistake, it's market timing. Try to avoid these intuitions, try to avoid your feelings, your thoughts around what's right, because often we just cannot make the right decisions because markets do not work in a logical manner. There's a lot of unknown reasons for why they do what they do, and we don't know when or how the market will go up or go down. The fourth mistake I see is people that try to trade constantly, meaning they're trying to outsmart the market, buy individual positions, get in or out of certain stocks because of XYZ reason.
• 10:41
  And what really happens here is they're just trying to make themselves feel good, trying to make themselves feel smart. And I've found that trading is really just acting like you're smart instead of being smart. We know that all of the different investors that have gone before us, the really smart ones, the ones that have made a ton of money have actually just said for the average person, just go buy the full market and stay diversified, and that will be the thing that actually makes you wealthy, right? Because as soon as we start doing this trading thing, it will consume you. If you're constantly looking at the market every single day, if it's up 2%, you could sell this and buy this other thing.
• 11:15
  My goodness, you will drive yourself insane. And if you are someone who's doing that, you probably feel the weight of what you're doing, but if you've done it before, you could probably agree with me and say, Jacob, you're exactly right. Just the constant weight that I feel whenever I'm being a day trader and trying to get in or out or do the right thing or pick the right stocks, that is not the way to build wealth because you cannot sustain it long term. Plans are only good if you can actually execute them. So it doesn't matter if you can do it for a week or two, but if you can't do it for ten years, then it's probably not the right thing for you.
• 11:44
  The best plans are the ones you can stick to and execute consistently. So constantly trading, trying to do things and be smarter than the market is not a winning strategy for the average person. Yes, you can make good decisions, but the problem is you're never gonna tell anybody about the bad decisions. And if you have a friend that's telling you about all the money they've made in the stock market by day trading, well, they probably have made money, but they haven't told you about the losses either. So don't be fooled.
• 12:09
  This is a mistake that a lot of people make, and I would say that I see it commonly, especially in people who've done well in the stock market. They continue to try to do this in retirement, but it becomes a greater risk because now you cannot afford to lose great sums of money like you might have been able to whenever you were working. Now, the fifth investing mistake that could mess up your retirement is lack of diversification. Now, the reason that I wanna talk about this one is because this is one that I've been seeing a lot lately. Many people are invested in some of the largest US stocks.
• 12:37
  Think of your Apples, your Teslas, your Amazons, your Googles, your Facebooks. All those could be really great companies and in fact, they've performed or outperformed over the last ten to fifteen years by a large margin. The question is, when will those not do what they're doing now? And what's happened here is we've had those particular companies or just all the large companies, they have grown in market value compared to the other stocks that are available. Therefore, a larger weighting has been tied to those different holdings, especially in like the S and P five hundred, more weight of your money is being allocated towards those stocks.
• 13:12
  So what that means is, is if those stocks ever start to decline or decline more than the other stocks that are out there in the world, you will be in a world of pain. Meaning you could be way over allocated towards particular positions because they've outperformed. Now, here's the risk that a lot of people run into is whenever we start thinking of what to invest in, we think about what has it done over the last one year, five years, ten years. And we look at those different investment returns and we say, I'm gonna invest in the one that's done the best. And it makes sense, right?
• 13:43
  Because that's our natural intuition is to do that. We don't wanna buy things that do poorly, but I could flip that on its head and say, well, what if everything always ends up working out and evening out or reverting to the mean is maybe a more technical way of putting it. What if everything evens out in the end? Meaning if these small cap stocks that historically have done better than large cap stocks, if they've underperformed for ten or fifteen years, does that mean that at some point they might start doing better? And they may or may not, I don't know.
• 14:11
  But if we look at this based on principles and history, we can see that there are different time periods where different types of investments or subsections of the market, whether it be sector based or size based investing, there are different times when each of those have done better or worse. And so in order to eliminate the unnecessary risk of picking wrong in the stock market, we need to be diversified. And so what this does is it eliminates the highest of highs, but also eliminates the lowest of lows. So if you think about it, whenever you buy everything that's available to you, you avoid picking wrong. Yes, you're gonna include some of the losers, but you're gonna include all the winners as well.
• 14:48
  So what you're really fighting for is the average of all the stocks out there in the world. So I say this to caution you just a little bit. Yes, this recent run, especially within The US market has been very good. It feels really good to make a lot of money, but I want you to evaluate for yourself. Is now a good time to rebalance if you're not currently rebalanced properly or diversified properly?
• 15:09
  If you've not done any rebalancing over the last three years, different sections of your holdings such as large cap or tech stocks are gonna be much higher weighting than they were at the beginning of that three year period. So you need to go in, check this out, look at these things because what could happen is, is you without a lack of diversification could have a greater downside if and when a market correction happens. So that's what I wanted to warn you with today. And that's just something that I've seen a lot over the last, twelve months or so of people having way too many concentrated holdings and yes, they've done well, and people don't like to give up what's done well, but I think being smart about it, having a structured plan around what you should do is gonna be a wise thing, especially if things get volatile or things go south. Now I say all of that, and I'm not a market predictor.
• 15:57
  I don't know what's gonna happen. I don't want you to take this as investment advice or anything like that. That's not the point. The point is to say, here are potential risks that could be in place in your portfolio, and they might actually be hidden risks for you because we have emotions as humans, we have ideas as humans, we think we're smarter than we are oftentimes. And so maybe this is a good time for you to evaluate where you're at, what decisions could you make to improve or decrease your risk profile within your overall portfolio?
• 16:23
  Now's a good time to evaluate that and think about it. Now to kind of wrap this up and give you a solution to these different investing risks, I wanted to just suggest that this is the value of having a custom plan that's built for you and based on your spending needs, right? If you've got an investment plan and a retirement plan that says my investment allocations are based on how much income I need from my portfolio, it solves the question of how much cash to hold, it solves the question of, you know, how much should I be investing in stocks? It assigns a purpose to your money. And what this does is whenever you say I'm gonna have X amount of money in cash, X amount in fixed income and X amount in stocks, you've assigned a purpose to each of those different buckets.
• 17:02
  And you know that if the stock market goes down, I've still got this cash bucket to fund my lifestyle. I So don't have to panic, I don't have to worry because I've got this money on the sidelines for this particular purpose. And what this will do is it'll naturally help you stick to your plan. So a plan that you create now while things are really good will help you stick to the same plan whenever things start to get bumpy. It's really hard to actually stick to the plan in the moment unless you have it written down and you know what your steps are gonna be when things are not going as well as you'd like them to.
• 17:32
  So that's my recommendation for you. If you don't have a written plan, if you don't have one that you can go to and say, what does it say to do in this type of situation? Then I would suggest getting that in place. Now's the time to do it before anything bad happens and evaluate your current overall allocation. Are there risks there that are hiding that could be making you actually overexposed to different things that you otherwise didn't know about?
• 17:55
  Check that out and always remember to avoid making reactional decisions. I hope this has been helpful for you and gives confidence to you as you continue on your retirement planning journey. Thanks again for listening to this week's episode of Retirement Answers. I look forward to talking with you again next week. Hey, it's Jacob again, and I wanted to extend a quick offer to you.
• 18:15
  If you have a question and you would like to have it answered here on the show, please email me at jacobretirementanswers dot net. And I'd love to answer that question for you right here on the show. Also, wanted to remind you that nothing discussed in today's episode is meant to be financial, legal or tax advice. Retirement Answers is for educational purposes only. Thanks for tuning into this week's episode.
• 18:36
  I look forward to talking with you again next week.