|10 top investing blunders
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3. Letting investments languish
If you've arranged to have money siphoned out of your paycheck directly into a savings account -- pat yourself on the back for taking that step. But don't stop there.
Saving money is a great start, but if you're not investing it wisely, you'll miss out on long-term gains, says MarksJarvis.
She illustrates this point with the example of a
35-year-old who, by holding $30,000 in a savings account
until she retires, will have $46,000 after earning
interest and paying taxes (assuming a 2 percent average
annual return and a 25 percent federal tax bracket).
"On the other hand," MarksJarvis says, "if you put that same $30,000 into a 401(k) or an IRA, you wouldn't be paying taxes on the money as it builds up year after year. By investing in a simple stock market (index) fund, that very same $30,000 would likely, if it followed history, turn into about $540,000 (assuming retirement at age 65 and an average annual return of 10 percent)."
4. Paying taxes
Why give Uncle Sam money any earlier than you have to? Instead, put your money to work for you.
In the above example, what if the investor bought the same mutual funds in a regular taxable account instead of investing in an IRA?
MarksJarvis explains: "If they earned the same return on their investments, instead of having $540,000, they would end up with about $260,000 because it would be taxed. This again assumes a 10 percent average annual return, retirement at 65, and a 25 percent federal tax bracket. Taxes take a huge amount out of the wealth that builds up year after year after year."
People sometimes forget to factor in the upfront tax benefits of 401(k) plans, says Salmen. "One of the typical mistakes that I see people making is paying extra on their mortgage but not funding their 401(k) or putting enough into it. Mortgage interest is usually your cheapest interest rate and there are tax deductions on top of that. Money that you put into a 401(k), you're getting an upfront tax deduction on," he says.
Of course, you'll have to pay taxes eventually -- but not until it's time to take withdrawals from your tax-deferred retirement plan.
5. Failing to strategize
It's time to pick funds from your 401(k) lineup. All you do is pick the ones that performed the best, right?
Wrong. Before you research the investment, there are a couple of things to think about. First, plan your investment strategy.
"For any investment program, sometimes people jump right to the investment they choose," Pallaria says. "But they need to determine what asset classes they want to cover before jumping to investments. Once you've got the asset classes, now go pick the investments that are best in these categories."
|-- Updated: June 10, 2009