Investing Traps

Gregory J. Cook, EA, CPA+ Accredited Tax Advisor Past President Alabama Society of Enrolled Agents Past President Alabama Association of Accountants

Don't Get Caught in Investing Traps


If you're taking a vacation, you plan carefully. You decide on a foliage tour or a visit to a theme park, a bed and breakfast or a condominium, one week or two. You try to avoid common "traps" of vacation travel -- crowds, long waits, and high prices.

Investing for retirement is a lot like vacation planning: the more carefully you choose your strategies, the more comfortable you expect to be when you retire. And, like vacation planning, you need to avoid investing traps that can snare your savings.

Watch the Store
To reach your goals, monitor your investments. Correct mistakes quickly. A frequent error investors make is to carefully design their retirement investment strategy and then expect it to perform on automatic pilot. Look at your account regularly to be sure your investments are performing as you anticipated. If, over a reasonable time, your investments don't meet your needs, make any necessary changes.

Don't Overdo It
You're investing for retirement and that's a long-term proposition. Don't worry about daily market gyrations. If you sell every time an investment declines slightly, you'll not only forego some good opportunities for capital appreciation, but you'll also never have a restful moment. By matching your mutual fund's performance against that of similar funds and appropriate benchmarks, you'll be better equipped to spot a trend that's not just a flash in the pan. A quarterly check can tell you whether your fund is under-performing or keeping up with its peers and relative benchmarks.


Don't Be Too Conservative
If you invest all of your money in a money market or similar fund, your risk may decrease but so will your return potential. Investing in funds that seek to preserve your principal means that your return probably won't do much more than keep up with the current inflation rate. To have enough money for a comfortable retirement, you need some investments that offer long-term growth potential.

Diversifying your investments among different asset classes can help to reduce your risk. When you diversify, you put some of your money in conservative investments such as market funds or even corporate or government bonds and the rest in investments that seek higher returns although typically at a higher level of risk. If your retirement is still a long way off, you can afford to take on riskier investments, such as growth stocks, that offer the potential for high returns. Even if retirement is just around the corner, some higher risk investments that offer the opportunity for capital appreciation may well be appropriate for your account.

Diversification also means that your investments may be less affected by market peaks and valleys. While one investment class may fall sharply, another may go up at the same time.

Don't Make Unnecessary Withdrawals
In a financial crunch, you may be tempted to take money out of your retirement account. But, if you take an early withdrawal, you may be subject to a penalty as well as income tax at your current ordinary income tax rate. Just remember that any money you withdraw from your account is not being invested for your future. Bottom line: Leave your money invested until you retire.