Can a diligent retirement saver still find a way to put a crack in a nest egg? Sadly, yes.
Just like a tennis player can lose a match because of too many unforced errors, 401(k) account holders can beat themselves, too.
Even investors who do all the right things, such as maxing out their 401(k) and building a portfolio with the right mix of stocks and bonds, can shrink their long-term returns by making poor decisions with cash they've already invested.
The growth of retirement assets is often impaired by knee-jerk decisions that backfire. Things like fear-driven selling. Playing it too safe. Or going all-in at the wrong time.
Self-inflicted money miscues can be costly. Here are five common mistakes that often result in portfolio underperformance.
De-Risking Too Much Prior To Retirement
"De-risking" is another word for selling stocks to avoid a market downturn. Taking chips off the table and raising cash isn't necessarily a bad thing, especially if you fear a job loss or have a big expense looming.
But de-risking to dodge a bear market often doesn't turn out well. It can prove costly if you're out of the market and miss the recovery.
"De-risking does sound intelligent because what you're doing is reducing the risk in your portfolio," said Lisa Featherngill, director of wealth management at Comerica. "But what it doesn't contemplate is what's the cost of doing that?"
You can't make money from the sidelines.
"You present yourself with another problem: When do I get back in?" said Dan Casey, investment advisor and founder of Bridgeriver Advisors.
Many investors never get back in. And missing big up days is a recipe for lower returns, history shows.
About eight of 10 (78%) of the stock market's best days occur during a bear market or during the first two months of a new bull, according to Hartford Funds. And if you missed the market's 10 best days over the past 30 years, your returns would have been cut in half.
The problem? "Nobody knows when those days are going to be," Featherngill said.
Selling shares short-circuits the wealth-generating benefits of compounding, says Ross Mayfield, investment strategy analyst at Baird.
"The minute you pull your money out and go to cash you stop that process dead in its tracks," said Mayfield.
Selling Out Of Panic
Fleeing stocks due to fear creates a drag on performance.
This profit killer was highlighted by a recent T. Rowe Price study that looked at the long-term performance of two types of investors. A "steady" investor stays the course and keeps investing during downturns. And an "anxious" investor moves account balance and contributions to cash when stocks fall 10% in a quarter, and the investor doesn't get back in until the market has four straight quarters of gains.
Despite each investor investing $2,000 per quarter from 1990 through 2022, the steady buy-and-hold investor had a balance of $1.47 million 30 years later versus $312,616 for the anxious investor.
In times of stress, often the best move is to do nothing, the study concluded. With human longevity on the rise, many people must fund 20 or 30 years of retirement. That's why T. Rowe Price recommends that people have 40% to 60% of their assets invested in stocks heading into retirement and to hold a healthy helping of stocks after they stop working.
"A good chunk of your investments need to support a pretty long-term goal, and you need that money to have growth potential," said Roger Young, senior financial planner at T. Rowe Price.
If you do bail out of stocks, a good way to reenter the market is via dollar-cost averaging. Put in a set amount each month or quarter. "That way you're taking the emotion out of it," said Featherngill.
And remind yourself that you have history on your side, adds Baird analyst Mayfield. He notes that the S&P 500 has never posted a negative return over a 15-year period and that the big-cap index has made a new high after every bear.
"If you have a long-term view, you don't need to think about the immediacy of whatever risk-off event is happening," said Mayfield.
Forgetting About Zombie Accounts
Improperly investing small balances in forgotten 401(k)s from earlier jobs is another mistake. Make sure zombie accounts have the potential to generate sufficient returns. You don't want to learn years later that a modest 401(k) balance has been sitting there earning nothing.
"You might say, 'It's not a big number so it won't hurt too much," Young said. "But that extra investment could really help out over the years." A modest $10,000 investment that earns 10% a year would grow to nearly $175,000 over 30 years.
One fix is to consolidate your accounts, so you know what you own. "Don't let it get to the point where you've got 10 accounts," said Casey.
Playing It Too Safe
The fear of losing money and playing it too safe can also crimp returns. Many people make the mistake of viewing their portfolio in terms of how much income they'll need to pay the bills in retirement, Featherngill says. The downside? There's a tendency to overweight fixed-income investments and hold too little growth-oriented stocks.
The fix? Once you determine how much cash you need to live on each year, you can plan to have that much available in liquid assets. The rest of your portfolio should be invested with a longer-term perspective. "That will push you toward a more balanced portfolio and a larger stock allocation," Featherngill said.
Holding Too Much Cash In Retirement
Sure, you need an adequate emergency fund. If you're working, it's good to have three to 12 months of expenses set aside. Retirees should have one to two years of "sleep-at-night money" socked away, according to T. Rowe Price.
But the rest of your capital should be invested in a way that generates higher rates of return that allow you to meet your long-term financial goals, says Casey. "A lot of people get the warm fuzzies knowing that they have $30,000, $40,000, $50,000 at the bank," said Casey. Often, that money could be put to better use.
