Feedback from Yahoo!Finance Readers – 4 Retirement Strategies to Avoid Now

By in Asset Allocation, Automatic Saving, Bond, Investing, Retirement

I’m excited that my recent contribution  to U.S. News and World Report, “Four Retirement Strategies to Avoid Now“, was picked up by Yahoo! Finance. Every personal finance expert hungers for this type of coverage. I’m also pleased that the article received 258 comments. Even the negative remarks show that people are reading and thinking about investing and building wealth. This article drills down into the 4 Retirement Strategies to Avoid Now and prints some of the excellent comments which added to the conversation. jump for joy_google images_flickr

Evaluate the Four Retirement Strategies to Avoid Now

1. Don’t hold a long term bond fund now. This caution is based upon the fact that as interest rates rise, bond values will fall. This is a fact. Further, long term bond funds fall more with a rise in interest rates than short term bonds.

For clarification, I didn’t say, don’t hold any bonds or never hold a bond fund.

Bonds are an important part of every investment portfolio. It’s helpful to understand their characteristics. If you have an asset allocation with bond funds, I’m not recommending eliminate those funds, but simply suggesting you might want to switch to shorter term bond maturities as interest rates rise.

2. Don’t skip the workplace retirement fund. Whether there is an employer match or not, investing for the future is really important. Time is the most valuable commodity an investor has. Even more important than high interest rates, time in the markets gives your money the opportunity to compound to unbelievable levels.

Invest $1,000 today and compound the returns at 6% per year for 20 years and that $1,000 is worth $3,207.

Invest $1,000 today and compound the returns at 6% per year for 40 years and that $1,000 is worth $10,285.

You invested the same $1,000, received an identical return and doubled the time invested. Notice, you doubled the time invested and tripled the amount of money available to you. Invest for retirement as soon as you begin working and time along with the power of compounding will multiply your contributions.

3. Don’t drop a large amount of money in the stock market right now. If you have a lot of cash right now, first off, congratulations. Secondly, invest it gradually into your preferred asset allocation. Although research supports that in most cases lump sum investing is preferred over dollar cost averaging, when valuations are in the higher realms, you’re probably better off investing part of the lump sum in equal installments over the next year or two.

I did not recommend avoiding the stock market. Nor am I suggesting that “timing the market” is a profitable long term investment approach. This caution is influenced by the higher valuations of the current stock market. If history is any guide, over the next few years, stocks will revert to their long term average returns (not the 20+% market returns we’ve seen in 2013) and you don’t want to plunk down a big investment only to see the markets experience a cyclical decline.

4. Don’t consider stock mutual funds or dividend stocks the holy grail of investing. Investors tend to get excited after a bit run up in the markets and believe the most recent performance will continue into the future. This caution results from the inaccurate belief that dividend stocks are fool proof because of their dividends. According to James Cahn in Forbes, Beware the Pitfalls of High Yield Stocks,

“However, dividend paying stocks are subject to risks such as risk that the dividend could be cut, risk that the price of the stock could decline or lower-than average potential for price appreciation. [The yield is based on the dividend and the stock price. If the dividend itself increases, or the price of the stock decreases, then the dividend yield can go up.] In some cases, corporations which have some kind of difficulty will hike the stock dividend in order to attract yield-hungry investors.”

View these investing cautions as specific to the current market environment and not guidelines for all market conditions.

Although a balanced portfolio of diversified index funds is generally the best investment strategy, investors also need to maintain conscious awareness of the economy and markets.

More Investing and Retirement Ideas from Yahoo! Finance readers of Four  Retirement Strategies to Avoid Now.

Lloyd writes, “Stay out of debt. Credit cards and typical interest rates of 30%( ouch) is what drags people down all their lives. Living beyond your means. Kids are not cheap either. Learn to tell them no. Its common for people to want to make them feel better at the time. Ever buy something then get it and the feeling is gone but the payments are still there? My grandfather always told me, if you want to live good when you get old stay out of debt while your young. Easy to say hard to do.”

Roger writes, “It has always amazed me at the people who say I can not afford to contribute to my 401k, and then they start talking about what they watched on cable TV last night. Even for lower paid people, having 6% deducted from their check in order to get the employers 3% match is usually only $30 a week or so. But the same people who do not realize that $30 a week plus the company match will add up over the years to come, are the same people who do not think paying $75 a month for cable TV will add up over the years.”

Eric writes, “Another good thing to do is live below your means….”

Cenunz writes, “Take advantage of that 401k but don’t throw away the piggy bank either. You can do both. I don’t make much money per paycheck but manage to be able to do both by only using the left over money for bills and priorities (food).”

Action Step

Challenge yourself to learn a bit about investing every week. You’ll become wealthier in the long term.

What to read? Elements of Investing by Malkiel and Ellis and How to Get Rich; Wealth Building Guide for the Financially Illiterate

What are your recommendations for retirement savings today?

image credit; google images_flickr creative commons