12 Ways to Lose $1 Million
You could do it by making these investment mistakes
(This article appeared previously on MarketWatch.)
You've heard of 50 ways to lose your lover. I'm going to tell you 12 ways to lose $1 million — it's much easier than going to divorce court.
Such a mistake costs more than just money. It could require you to work more years before you retire and live on less money after you stop working. Here's an earlier column I wrote on this topic.
If you want to repeatedly shoot yourself in the foot financially, here are a dozen easy ways. Think of this as terrible advice that I hope you won't take:
1. Follow your emotions and bail out of your investments too quickly. Most do this in order to stop the pain of losing money in a bear market. In order to lose $1 million, you might have to do this only once. Cash out after a downturn, then sheepishly buy back at a higher price. This happened to millions of investors in 1974, 2002 and again in 2008.
They got temporary relief, but they paid very high prices for it. The market recovered more than 37 percent in 1975, nearly 29 percent in 2003 and 26.5 percent in 2009. Years like that are exactly when investors should be fully invested.
2. Procrastinate. Wait to start saving money. There's never a shortage of good reasons to put off retirement savings. But the awful result is simple mathematics.
If you save $5,000 a year for 40 years and earn 8 percent, you'll wind up with just short of $1.3 million. But if instead you wait five years and put aside $5,000 for only 35 years, you'll have $861,584. That first five years gave you $25,000 to spend (because you didn't have to save it); but it cost you $433,698 at retirement.
That's a bum deal if I ever saw one. For more, check out this column.
3. Don't take enough risk. You may like guaranteed returns and no losses. You may think stocks are like gambling. But that "safety" can easily cost you $1 million. Long-term bonds return about 5 percent vs. the 10 percent long-term return of the S&P 500. Here's more on this expensive boo-boo.
4. Take too much risk, if you want a quick route to what could turn into big trouble. Decide to make your fortune by investing in just one stock or only a few.
This leads to trouble because of the probabilities. The expected return of any one stock is no greater than that of 1,000 stocks (a mutual-fund portfolio, in other words). But the risk of owning only one stock is vastly greater than the risk of owning many.
The result: With a single stock you get no more expected return but much more risk. It's a really bum deal.
5. Pay unnecessary investment expenses. Academic research is very clear on this point: No matter what you're investing in, higher expenses are the surest way to lower returns.
The average mutual fund charges approximately one percent in annual expenses. Many funds charge considerably more. Yet many excellent index funds are available with expenses less than one-fifth the average.
6. Avoid investing in small-cap and value funds. Target-date funds are an easy and popular way to make this million-dollar mistake.
Fortunately, this is a case in which you can have your cake and eat it, too. Put the majority of your money in a target-date fund and the rest in a small-cap value fund. You’ll likely be glad you did.
7. Be determined to beat the market. Convince yourself that you will surely do better than other people, especially when you combine your own common sense and intelligence with the help of "the best" stocks, managers and funds.
It's so easy and popular that the famous DALBAR studies consistently indicate that typical investors achieve less than half the returns they could get from index funds. This topic is important enough that I made it a whole chapter in my book, Financial Fitness Forever. Here's a quick overview.
8. Put your trust in the wrong place. Many investors, especially inexperienced ones, are attracted to fast-talking salespeople and their compelling stories. This mistake also rated a full chapter in Financial Fitness Forever.
9. Jump on the bandwagon of whatever's hot in the investment world. I've seen countless investors make this mistake over the years, and I can't think of even one example that turned out well after the investment fad ran out of steam.
Recall the technology boom in the late 1990s, led by companies like Microsoft and Intel. This was followed by a bloodbath in 2000 through 2002. Hundreds of high-flying companies that were once all the rage simply disappeared. The stock of Microsoft, always a leader in technology, is still worth much less today than it was at its peak in early 2000.
10. Don't contribute enough to your retirement plan to get the maximum company match. This is a sure way to shoot yourself in the foot financially and help you lose in the long run. You'll be snubbing your nose at what is essentially "free money," as if you refused to take a raise in pay.
11. Never turn down the opportunity to cash in on a profit. Lots of investors believe they will trade their way to success. They like to "lock in" profits while they ignore their paper losses in the hope that better days are ahead.
I can't find any evidence that trading works well in the long run. But if you insist on doing it anyway, it makes much more sense to follow the old advice to "cut your losses while they're small and let your profits run."
12. Pay more taxes than you need to. This one is pretty easy, too. Just don't take advantage of IRAs and company retirement plans, trade frequently in taxable accounts and buy actively-managed mutual funds with high portfolio turnover rates.
There you go, financial disaster in 12 easy steps. Maybe you're smart enough to avoid following this awful advice. But I'm pretty sure you know at least one person who's doing some of these things. Too bad.
Richard Buck contributed to this article.