Investors face a real challenge in managing their investments through what is hopefully a long, happy and comfortable retirement. Today, many can expect a retirement of 30 years or more—that means needing your money to work for you for at least that long. If you’re hoping to leave money to a spouse, heir or charitable cause, you’ll need your money to last even longer. Needless to say, the stakes are high. We’ve helped thousands of individuals and families plan for a comfortable retirement, so we know the quality of your retirement depends, in part, on the investment decisions you make today and over the coming years. Below we discuss some of the most common retirement investing mistakes so you can avoid them and plan better for the long term.
Misunderstanding the Risk-Reward Trade-off
The first—and potentially most important—investing mistake we see retirees make is believing they need a cautious, low-volatility strategy focused on fixed interest securities as opposed to equities.
Depending on your investing goals and personal situation, you may need predictable income streams or principal protection over time. So some stable, low-returning investments may be right to include in your portfolio. However, if you need long-term portfolio growth to reach your goals, investing too cautiously could increase the risk you run out of money in retirement.
One common misconception is that fixed interest is safer than equities. Whilst it’s true that fixed interest has often been less volatile than equities over shorter periods, fixed interest also comes with its own, often overlooked risks. For example, default risk is the risk that the fixed interest issuer defaults on the security, in which case, you may not get your entire principal back. Reinvestment risk refers to the potential that your future fixed interest payments may have to be reinvested at a rate lower than your original investment.
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