(This article appeared previously on MarketWatch.com.)
Retirement is nice in many ways, especially when the stock market has been strong. When we're making money with little effort, financial success can seem simple.
But important things usually aren't quite as simple as they seem. What we don't know and what we don't see in fact can hurt us.
Following his lead, I have identified four mental traps that can ruin an otherwise successful retirement. Fortunately, it's very possible to avoid each of these traps.
1. Betting On a Track Record
Perhaps the most common trap for investors is thinking that the recent past is a good guide to the future. This of course is tricky, because momentum really exists and often continues. But the financial tide can turn swiftly and unexpectedly; momentum can vanish in a heartbeat.
When shopping for a fund (the same is true when seeking a guru or an adviser), amateur investors almost always focus heavily on the fund's track record. They believe this will tell them something meaningful about how the fund's strategy will work in the future.
This trap wrecked a lot of retirements right after the turn of this century. If you've forgotten how it happened, here's a brief refresher. During the 1990s, the U.S. stock market (mostly big growth stocks represented by the Standard & Poor’s 500 Index) moved upward relentlessly, leaving almost everything else in the dust.
For a whole decade, the S&P 500 compounded at 18.2 percent a year, about twice its long-term average. Many people decided that investing was easy — just buy big, popular stocks, especially technology issues. Worrying about “risk” was regarded as something for sissies and old fogies.
Surveys in 1999 and early 2000 indicated investors expected to achieve average annual returns of 20 percent to 30 percent for the next 10 years.
Recalling that history, imagine for a moment that you were an investor in January 2000 with new money to invest.
Would you jump on the bandwagon of this compelling 10-year track record and fill your portfolio with the S&P 500? Or would you relegate only 10 percent of your stock portfolio to such stocks and instead diversify in "underperforming" asset classes like international stocks, small-cap stocks and unloved value stocks?
The latter course of action would have required you to believe in an asset mix that had about one-half the return of the S&P 500 for the decade just completed. But if you had done that, you were likely to ultimately prosper during the following 10 years.
On the other hand if you had done the former, believing the recent past was a good guide to the near-term future, you would have been clobbered. The S&P 500 actually lost about 1 percent a year from 2000 through 2009, including the reinvestment of dividends.
(MORE: 6 Risks to Your Retirement)
Our emotions (and Wall Street's marketing machine) may tell us that recent performance is a good guide to what's ahead. But the facts, as we just saw, show us the exact opposite.
2. Picking the Wrong Retirement Date
Anybody who has worked with retirees can describe retirements that were ruined by their failure to accurately address the question of when enough really is enough.
This problem grows in two varieties.
In the first, some people are impatient to retire. They may believe they have plenty of assets (more than enough) and that they will have only modest income needs after they retire.
But if their investments go south shortly after they retire (see above), they may suddenly be in a bind, having less than enough after they have left their jobs. Their dreams can be dashed and their lifestyles crimped.
In the second variety of this problem, a couple at the peak of their earning years keeps going right past normal retirement age, wanting to add more and more assets. This sometimes continues even when any outsider can see that their savings are more than adequate to meet their objectives.
When this couple finally decides that enough is enough, one or both of them may have health problems that make it impossible to live the way they always dreamed they would.
You may be thinking that these things couldn't happen to you and wreck your own retirement.
But I assure you that they can. Both varieties of this problem happen to smart, savvy people. No matter how smart you are, you're probably too close to the issue to see it clearly. There is, however, hope (see below).
3. Refusing Objective Help
In nearly half a century of working with investors, I have spent many hours helping people figure out how much is enough. Obviously (see above), it is not an exact science.
One tool I've found very useful is a collection of tables
showing hypothetical retirement distributions under various scenarios.
Despite my best efforts to explain what's in these tables, what they mean and how to use them, most people won't get their full value without some outside help. There are just too many moving parts and assumptions involved.
Still, many people ruin (or at least compromise) their retirement years by insisting that hiring an adviser is a big waste of money. Think about this: Can you afford the arrogance of believing that there's nothing important that you don't already know and understand?
At the very least, an objective outsider can recognize when you have emotional blinders that prevent you from knowing when “enough is enough.” A good adviser can help protect you from the twin emotional traps of fear and greed.
I know from personal experience that the severe challenges of the 2007-2009 bear market ruined the retirements of many go-it-alone investors. Yet thousands of other investors weathered this awful storm relatively well because they got help from professional advisers.
These advisers saved many retirement dreams that might have otherwise been wrecked. Did it cost money to buy their services? Of course. But in many cases, the help investors received in just these few years was enough to pay the advisers' fees for a decade — and perhaps even a lifetime.
4. Putting Faith in One-Size-Fits-All Funds
I'll touch only briefly on this fourth trap, the belief that investing is inherently easy and that a super-simple solution is the best solution.
Too many people compromise their retirements by believing that a simple solution is all they need. Specifically I'm referring to target-date retirement funds.
Only in rare cases, I believe, would one of these one-size-fits-all funds be likely to do the very best job for a given individual. They are put together on the premise that the only thing a fund manager needs to know about you is the approximate year you plan to retire. Once that's established, all other decisions are easy.
But is real life really that simple? I don't think you would trust your doctor's comprehensive plan for your health if all she knew about you was your age. So why would you trust your financial future to an investment plan that was based only on an assumed year of retirement?
You don't need to spend hundreds of hours or have an advanced degree to figure out how to make the most of your retirement investments. But if you dumb it down too much, you can cheat yourself out of the retirement you deserve.
Paul Merriman is founder of Merriman Wealth Management, a Seattle-based investment advisory firm, and president of The Merriman Financial Education Foundation. Paul writes a weekly column for MarketWatch's The RetireMentors and records a weekly podcast, Sound Investing. He has authored numerous books on investing including Financial Fitness Forever, Live It Up Without Outliving Your Money and the new How To Invest series available for free at PaulMerriman.com. Follow Paul on Twitter @SavvyInvestorPM.
Richard Buck contributed to this article.
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