18 Common Retirement Investing Mistakes and How to Avoid Them (2024)

Learn from your mistakes is good advice, but learn from other people’s mistakes is even better. I’ve been investing since 1996. In the process, I have learned a lot, mainly from trial and error. Today, I’d like to share some of the mistakes I’ve made when I was a newbie investor, along with some pitfalls I have managed to avoid along the way. Now with more experience under my belt, I’ll show you how to avoid these mistakes and pitfalls. I will also share some tools that I use today to help me with investing. Hopefully, you can learn from them and save yourself some trouble.

1. Start Investing Late

I started a part-time job during my first year in college around 1991. If I had known what I know today, I would have invested money in an IRA from day one. But like many other young adults, I was thrilled to have money and spent it all on things that I enjoyed — e.g., movies, games, electronics, etc.

Take a look at this chart. It shows the difference in wealth accumulated by the age of 65 by investing $1,200 a year at an 8% growth rate when you start at 20 vs. 30 vs. 40 vs. 50 years old.

How to Avoid this Mistake

Start investing as early as you possibly can.

If I had invested just $2,000 per year while I was in college, that $8,000 invested in an would be worth about $58,000 today (23 years later).

2. Not Knowing the Basics

In the beginning, I didn’t know anything about investing or the stock market. All I knew was that I should invest money to make more money.

My first move was to give my money to a full-service brokerage firm to invest on my behalf. This was a big mistake since each trade made by my broker costs a lot of money. And as it turned out, the mutual funds he picked were subpar and expensive house-brand mutual funds.

How to Avoid this Mistake

Start by learning about the basics of investing before you do anything. Choose a low-cost broker to work with, and start by investing in low-cost index ETFs.

I think today’s investors are lucky because useful information is so much more prevalent. Also, there are many low-cost brokerages now, even ones that offer free trading like M1 Finance, compared to the choices I had in 1995.

3. Chasing Past Performances

Once I got smart enough to switch to a discount broker, I committed another mistake. I chose mutual funds based on their past performance and Morningstar rating. The truth is top-performing funds in the current year tend to lag behind the market in the subsequent years. All I did was to buy at the high points for a statistically lower chance of beating the market.

Here is a chart from the study done by S&P Global:

How to Avoid this Mistake

Instead of choosing investments based on past performance, start by identifying your investment goals. For each goal, identify the best investment account, e.g., taxable account vs. IRA or 401(k) vs. HSA, and then build a properly allocated and diversified portfolio using index funds to meet each goal. Your passively managed index funds are statistically more likely to outperform actively managed funds.

If you’re uncertain, ask someone more experienced or consult a financial planner.

4. Not Paying Attention to Asset Allocation

When I started, my investment was mainly in large-capitalization U.S. stocks and funds. I did not know about asset allocation as a risk management and performance enhancement tool. It wasn’t until 1999 — when I became eligible for a 401(k) — that was when I learned about asset allocation and came to appreciate its power.

How to Avoid this Mistake

In my opinion, asset allocation is the best way to build a long-term portfolio. Figure out the right asset allocation mix for you and invest according to your asset allocation plan.

5. Ignoring Diversification

Again, with little experience and little money to invest, I was going after individual stocks and did not pay any attention to diversification. Like asset allocation, it took me a long time to realize how diversification helps to reduce risk and enhance performance. The value of diversification became apparent to me at about the same time that asset allocation did.

These days, I stopped investing in individual stocks altogether and choose to invest in just a handful of ETFs.

How to Avoid this Mistake

The first step is to invest in ETFs, which is a big basket of stocks, instead of investing in individual stocks. The second step is to invest across asset classes, globally, and in different sectors.

You can use tools like Personal Capital and Portfolio X-Ray Tool to check your asset allocation and diversification quickly.

6. Not Paying Attention to Expenses

I did not realize how badly expense ratios can affect investment performance.

When I started investing, there were no ETFs. Worst yet, mutual funds commonly charge front-end load (they take money when you buy) and redemption fee (they take money when you sell). Moreover, the expense ratios in the 1% range were the norm.

I always thought “it’s only 1%, what’s the difference,” and went for the investment with better performance. I finally ran some numbers, and I was shocked to learn that a difference of 1% can lower my investment performance by hundreds of thousands over the course of 30 years. Instead of ending up with $1 million, for example, I might only have $825,000.

How to Avoid this Mistake

The good news is expense ratio has been decreasing steadily over the years, and most investors should be able to keep their portfolio well below 0.35% these days.

You can use a tool like Personal Capital to analyze your investment expenses. Once all your accounts are linked, Personal Capital gives you a list of all your holdings, the expense ratios, and how much you pay each year. You can trade out investments with the highest expense ratio and swap them for lower-cost equivalents.

7. Not Paying Attention to Distributions

This is another issue that I did not pay attention to back then. I held some mutual funds in my taxable account. For a couple of years, I thought high distributions were really cool because I was making more money. How silly was that? Now I realize that I was paying taxes needlessly.

Also, it was possible to invest in a mutual fund, see the share price (NAV) drops, and get capital gains distribution which you have to pay taxes for.

Now, I invest mostly with ETFs, which are a lot more tax-efficient than mutual funds. Also, most of my money is in an IRA, so I don’t have to worry as much about taxable distributions.

How to Avoid this Mistake

ETFs help reduces this problem substantially. However, you still need to pay attention to your investments that are in a taxable account. You should invest in low dividend, low distribution, and low turnover funds in your taxable accounts.

8. Experimenting with My IRA

Back then, I had tons of ideas, but no money. Most of my money was invested in an IRA — so I experimented using my retirement money. That was a big mistake!

First, money lost in an IRA cannot be replenished. I was allowed to deposit $2,000 per year at that time, and that was it. Now, the limit is much higher at $6,000, but I would still advise not to play around with money in your IRA.

Second, I could not claim my losses as tax deductions. Since the IRA was tax-sheltered, the loss was simply a loss.

How to Avoid this Mistake

It is so easy now to experiment with very little money using a free trading platform like M1 Finance. You can experiment with different investing strategies and not having to worry about trading costs. When you’re in the experimentation phase, it is better to use a taxable account so that you can perform tax-loss harvesting on your portfolio.

Here is my little experiment portfolio: My M1 Finance Dividend Income Portfolio.

9. Selling Winners and Keeping Losers

This was my all-time weakness. I knew the concept of “buy low and sell high.” So with the little experience I had, I ended up selling a lot of my winners like Staples (SPLS), Ameritrade (AMTD), and Microsoft (MSFT) to lock in the gain. But I held on to my losers like Flemings and eToys (they don’t exist anymore).

Not only did I hold on to my losers longer than I should, but I also bought more shares in the hope of lowering my cost basis. This sounds good in theory, but it doesn’t work well with individual stocks that require more in-depth research compared to investment funds.

How to Avoid this Mistake

When you buy index ETFs, you don’t have to worry as much about owning an absolute loser that will go down to zero. If you follow your asset allocation plan and rebalance your portfolio regularly, you will automatically sell a bit of the winners and buy a bit of the losers; but this is okay because you’re not exiting any position, you’re just buying low and selling high in small increments.

However, if you insist on investing in individual stocks, make sure you know how to perform research about the company. Remember you’re not buying shares, you’re buying a piece of a business, and you have to understand how the business is doing and its outlook. If the stock starts to tank, you have to redo your research to see if it is the right move to invest more money, or if it is better to sell it off.

10. Investing without a Goal

When I started, I was investing just to invest and make money. Without a clear goal, I was chasing short-term performance and was prone to act on market swings.

Around 2007, with my son’s arrival, I became more purposeful with my financial goals. For example, my wife and I set up goals to build a $1 million investment portfolio in 10 years, set up our son’s college education fund, help my parents with investing for their retirements, etc.

How to Avoid this Mistake

These longer-term goals, and shorter-term goals like saving for a downpayment, compete for the same limited amount of money that you have. To be a successful investor, you need to have a plan and invest according to the plan.

It worth spending time to figure out all the things you want to accomplish, prioritize them, and put together an action plan to achieve each goal.

11. Selling on Corrections

These are symptoms of not having a clear goal. Since I was chasing short-term performance to make more money. I occasionally gave in to my emotion and sold my investments during corrections to protect my gains. Sometimes, I’d come out ahead by sheer luck, but most of the time, I ended up rushing back to reinvest my money as the market invariably rose after these corrections.

How to Avoid this Mistake

If you have a good plan and set up the right asset allocation, you should be able to weather all the ups and downs. There are also strategies to help you perform better during market corrections and bear markets.

More Retirement Savings Pitfalls

1. Leaving Money on the Table

Many companies offer matching contributions for their 401(k) plan. This is virtually free money, an instant return on investment. If your employer offers a 401(k) match, you need to make this your top priority. Do whatever you can to get all of the matching contributions, even if it means delaying other financial goals.

In my 401(k) Plan article, I demonstrated how contributing to 401(k) to get the match should even take priority over paying down debt!

2. Not Increasing Your Contribution

As you get your pay raises, you should try to keep your living expenses the same and increase your retirement savings. Many people make the mistake of spending their raises before they even get them.

Also, remember that 401(k) and IRA contribution limits tend to go up each year. If you’re in the position to max out your contributions, your raise should first go toward meeting these limits.

3. Borrowing from Your 401(k)

Most401k plans allow you to borrow against it. However, you should avoid this pitfall. Here are some reasons why:

• Some plans do not allow you to contribute while you have a loan outstanding.
• You disrupt your investment growth.
• If you quit or lose your job, you will have to pay the remaining balance right away or risk paying the 10% early withdrawal penalty.

4. Cashing Out Early

This is a huge mistake. Cashing out of 401(k) or IRA before the eligible ages of 55 and 59 ½ (respectively) will result in a 10% early withdrawal penalty, on top of the income taxes you have to pay on the withdrawn amount. Whatever you do, you should not touch your retirement funds until you reach the eligible age.

If you change employer, you have three choices to avoid cashing out:

• Keep your money in the old employer’s 401(k) plan
• Roll your money into new employer’s 401(k) plan
• Roll your money into your own Rollover IRA account

5. Investing Too Conservatively

I cringe every time I hear my colleagues invest their entire retirement savings in a Bonds fund, or worse yet, keep it in cash. For young investors, it will be decades before they withdraw money from 401(k). Even for people who are near retirement, their retirement may last 20 or more years.

With retirement savings, you should invest as aggressively as your ability, willingness, and need to take risk allowed. At the very least, put your money in a Target Date Fund. Otherwise, your investment may not grow quickly enough to support your retirement.

The rule of thumb is you should have at least 120 minus your age as a percentage of investment allocated to stocks. For example, I am 45 now so I should have at least 75% (120 – 45) of my retirement savings invested in Stocks and 25% in Bonds and Cash. Currently, I am even more aggressively invested in the stock market than this.

You can also use the Investment Checkup Tool in Personal Capital to see how your portfolio compares to the recommended allocation.

6. Not Looking at Your Entire Portfolio

If you currently have several investment portfolios, you should look at your asset allocation and diversification across all of them as a whole. It’s easy to miss this point and just treat each portfolio as a separate entity.

You can use tools like Personal Capital and Portfolio X-Ray Tool to check your asset allocation and diversification across multiple accounts easily.

7. Investing in Your Company’s Stocks

Unless you can buy your company’s stocks at a deep discount or you can get them for free, you should not buy your company’s stocks. There are many reasons why this is a bad idea:

1. If your company tanked, you lose both your job and your investment.
2. Individual stocks are not good for diversification.

Bottom Line

As you can see, I was not a very good investor when I started, and it took me a long time and too much money to learn from my mistakes. I hope that by sharing these common pitfalls, you can avoid some of them on your journey. Good luck with your investing!