Soon you’ll see your timeline filling up with April Fool’s jokes – some clever, some terrifying – and then you’ll get on with your life. But it can be useful for investors to pause for a minute and take stock, says Suze Orman, host of the Women & Money… and Everyone Smart Enough to Listen podcast and co-founder of emergency savings firm SecureSave.
“Given that it’s April Fool’s Day, it’s a good time to evaluate the steps you’re currently taking,” she says. “Are you a financial nut or not?”
There is no strategy that is suitable for every type of investor. But if you make some of the most common mistakes Orman sees investors making, like the three below, They’re likely to cost you money in the long run, says the finance guru.
1. Your holdings are not diversified enough
With the bull market in full swing for much of 2020 and 2021, many investors gravitated toward funds that had recently performed well, such as Cathie Wood’s ARK Innovation ETF. “People loved Cathie Wood and that’s all they bought. And they think because they bought an ETF that they’re diversified. How stupid can you be?”
Orman points out that the problem is that while funds like Wood’s hold a variety of stocks, the portfolio is still relatively narrow and focused on a specific theme. If that particular corner of the market suffers, as it has of late — the ETF in question is down about 56% from its February 2021 peak — your portfolio could be hurt by the losses.
2. You don’t invest during downturns
If you’ve seen your portfolio in the red, you might have been tempted to put the brakes on your investments until things cool down a bit. But if you’re a young investor decades from retirement, shying away from a declining market is a big mistake, Orman says.
“They want the market to go down,” she says. “When you’re 35, you don’t want to invest money every month in something that’s already very high.”
When markets are falling, investing more money can be scary. But if you invest a set amount of money at evenly spaced intervals — a practice known as dollar-cost averaging — you can be rewarded over the long run if you keep buying stocks as they go on sale.
“As mutual fund shares fall, your money buys more shares. The more shares you have, the more money you will have over the long term when the markets rise again.”
Video by Helen Zhao
A simple way to follow this strategy is to instruct your employer to divert money from every paycheck to a retirement account at work, such as a pension account. a 401(k). Many of these plans provide a matching contribution to employers who save through the plan, a benefit you shouldn’t ignore just because markets are falling, adds Orman.
“You’re a complete idiot if you freak out when markets are falling,” she says. “And if your employer does your bit, you’re a double fool. A fool squared.”
3. They don’t take advantage of Roth
Retirement accounts like 401(k) and IRAs come in two main flavors: traditional and Roth. Traditional accounts come with an upfront tax credit — money you put into them can be deducted from your taxable income for the year you contribute. In exchange for the break, you owe taxes on any monies you withdraw from the account when you retire. And if you withdraw the money before the age of 59, you have to pay taxes plus a 10% penalty.
Roth accounts work in reverse. You fund these accounts with money you’ve already paid taxes on, but you reap the tax rewards later. From the age of 59, the money you withdraw is tax-free, provided you have had the account for at least five years.
Plus, you can always withdraw tax-free up to the amount you deposited.
Video by Courtney Stith
Whether you should invest with one or the other is up for debate and depends on your financial situation. But for young investors, the choice is clear, says Orman: “If you’re in the accumulation phase, you’re a fool not to benefit from a Roth IRA.”
Assuming you’re just starting out in your career, chances are “you’re not in that high a tax bracket,” she notes. “And even if you are, you’re better off today and able to accumulate taxes if you follow the rules, tax-free, for you and your beneficiaries.”
You could also avoid encountering some of the problems associated with earning taxable income in retirement, adds Orman. “Thinking further ahead will count against income that could make your Social Security taxable. It counts against your Medicare Part B premiums. They have required minimum payouts that you must take. And if you die and the account goes to your beneficiaries, they may be in a higher tax bracket and have to pay tax on it when it is paid out.
The views expressed are general and may not be suitable for all investors. The information contained in this article should not be construed as, and should not be used in connection with, an offer to sell or the solicitation of an offer to buy or hold an interest in any security or investment product. There is no guarantee that past performance will be repeated or result in a positive outcome. Before making any investment decisions, carefully consider your financial situation, including investment objective, time horizon, risk tolerance and charges. No level of diversification or asset allocation can guarantee profits or hedge losses.
More from Grow:
Comments are closed.