Thinking About Retiring? Making the right investment decisions as a retiree is critical because those investments will provide you with income during retirement. Try to avoid these top four common mistakes that expose retirees to the very risks they are trying to avoid.
Here in no particular order are the top mistakes and how to avoid them:
Assuming that the market is headed for a downturn/serious correction.
The reason for this thinking: because the market has been strong and done well for so long since coming out of the recent recession. While it’s true that what goes up must come down eventually, it is also true that this market can continue to grow for some time based on the strength of the fundamentals. That’s what you need to consider when deciding whether or not to invest. Since 2008, low interest rates coupled with central banks around the world injecting billions of dollars into their economies have been fueling the growth of capital markets. Nothing has changed on this front--at least for now.
Buying so-called “hot” investments.
By the time you read about an investment in the newspaper or learn about it on TV, you will likely be paying a much higher price than the person recommending it paid. In other words, you’ll be buying high and driving up the price further in the process. Consider the source of the information and the motive behind the recommendation. Talk to an advisor who can provide insights based on independent market knowledge.
Focusing solely on wealth preservation at the expense of growth.
This really comes down to not appreciating your time horizon for investing is longer than you may have anticipated. I often hear from retirees who say they can’t afford to be in the market because if there is a dip in the stock market they won’t have time to make up any losses. No one wants to lose money but unless you need all your funds in the short term, diversifying your portfolio by investing in equities (i.e. stocks or mutual funds) can actually protect you against some of the inherent risks that exist. The average life expectancy in Canada is 80 for men and 84 for women. If you retire at age 65, you’ll need your money to be working for you for at least another 15 to 20-plus years. That is a long-term time horizon. In my opinion, with today’s low interest rates, there is no alternative but to be in investments that will provide an income, keep pace with inflation and grow.
Playing it too safe.
Some retirees think the best way forward is to hold the majority of their wealth in fixed-income investments such as GICs and corporate and government bonds because of the perceived low risk of these types of investments. What they don’t realize is that in a low-interest-rate environment the risk to these types of investments is inflation. Inflation is greater than the yields these investments provide. The way to avoid this mistake is to ensure you have a diversified portfolio that includes equities as well as bonds and GICs. The fact is today’s market is considered fairly valued and not over-valued by many, thus investors should feel confident that it is not only possible to invest but necessary to ensure you continue to build wealth and to offset the risk posed by low interest rates.
Word to the wise...
Use short-term events, such as Greece’s recent debt default, as an opportunity to look closely for opportunities to buy low and sell high.
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read all articles in Allan Small's Worry Free Retirement Series ----------
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