By Nicholas Pell for FutureAdvisor
How’s your investment strategy working? Your long-term plans are the key to making the most out of your investment dollars. And even one little thing going wrong could cost you thousands of dollars over the life of your retirement investing. The problem is that you might not even know that your investment strategy is off-track. So, what are some major red flags when it comes to your retirement plan?
1. Paying Too Much in Fees
Fees are a big problem. In the 21st century, there’s just no reason to pay high management, fund or load fees to invest for your retirement. What are high fees? First, keep an eye out, because fees can be hidden everywhere — but you shouldn’t be paying more than 1 percent in total fees across your entire portfolio.
Online financial advisors — “robo-advisors” — make high fees very much a thing of the past. There’s just not the same kind of overhead involved when computer programs are automating the entire process for you.
2. Losing Sleep at Night
This is a big one. While there are a number of things that might cause you to lose sleep at night, your investments shouldn’t be one of them. You should be able to be involved if you want — but if you don’t, you should be able to just set it and forget it. The only attention you absolutely have to give to your retirement accounts is to look at your statements every quarter or so.
While your investments might go down sometimes, as is the nature of the market, they’ll also go up. So put the money in, leave it alone, and let it work for you for the long term.
3. Not Understanding Your Portfolio
While you should be able to set and forget your portfolio, before doing so, you should also have some idea of what’s in your portfolio and what it’s doing. And this should help you sleep better at night.
You don’t need to understand each and every column and row on your ledger; you just have to know how you’re allocated — broadly speaking — what industries you’re invested in and why, and how your money is being rebalanced and when. In short, you need to know what the strategy is and how it’s being implemented.
4. Not Taking Advantage of Tax Shelters
Think of taxes as the ultimate fee. Taxes will potentially take a much bigger bite out of your investments than any fee ever could. The good news is that there are many ways to shelter your money. This means not just utilizing tax-advantaged investments but also looking for tax shelters no matter where you’re putting your money.
Robo-advisors like FutureAdvisor have tax shelters baked into the mix. Put simply, our algorithms will sell stocks that will offset taxes you’ve made from profits in other areas. And, FutureAdvisor will make sure that assets that produce lots of taxable income — think REITs and dividend-paying stocks — are sheltered in your tax-free accounts whenever possible.
Related: 17 Smart Investments
5. Trading Too Much
Buy low, sell high? Sure, if you’re an “oracle” like Warren Buffett. Otherwise, you should be buying and holding for the long term — a strategy also highly recommended by Mr. Buffett himself.
Trading too much can not only pile up the fees, it can also put you in the least tax-advantaged place possible. Robo-advisors are basically computer algorithms that sell when it’s actually to your advantage, generally for tax purposes. Otherwise, your money should be left alone. The best tool in your toolbox is compound interest, and the best way to take advantage of that is to leave your money alone.
6. Not Setting a Goal for Your Savings
Goals are essential for helping you track progress and stay on task. If you don’t have goals that you’re saving for, it’s easy to sacrifice your retirement savings for objects and events that are more immediate and tangible. That could be a new car you really can’t afford or a wardrobe full of new clothes — it really doesn’t matter.
But what does matter is that the same money could be much better spent making sure you’re well taken care of in retirement, when major long-term expenses — like healthcare and nursing care — hit just as you might be unable to work more to make up for them. Savings goals help keep you on task, so sit down with your family and figure them out.
7. Not Using Employer 401(k) Matching Where Available
This has been said 10,000 times and needs to be said 10,000 more: If your employer offers matching 401(k) money, you need to max out your contribution. To not contribute is to be throwing money away — and not just the matching funds but also the compound interest resulting therefrom.
When it comes down to it, a lot of these signs are symptoms of not having an investment plan that you understand and can stick to. The recent rise of web-based tools has made this easier than ever. A robo-advisor like FutureAdvisor can work with you to create a plan, explain the logic behind it and even take care of the legwork to ensure you’re staying on track. Doesn’t that sound like a way to sleep a little easier?
Keep reading: The Top 10 Online Wealth Management Services
The views expressed herein are not intended to serve as a forecast, a guarantee of future results, investment recommendations or an offer to buy or sell securities by FutureAdvisor. Differences in account size, timing of transactions and market conditions prevailing at the time of investment may lead to different results, and clients may lose money. Past performance is not indicative of future results. The tax loss harvesting strategy discussed should not be interpreted as tax advice and it does not represent in any manner that the tax consequences detailed will be obtained or that its tax loss harvesting strategy will result in any particular tax consequence. Clients should consult with their personal tax advisors regarding the tax consequences of investing.