Your top 10 retirement savings mistakes (part 2)

In case you missed it, here’s Your top 10 retirement savings mistakes (part 1). And now, let’s finish the list of things you really shouldn’t do if you want to have the retirement you deserve.

Saving outside of retirement funds

The advent of ‘investment’ apps like Robinhood and Binance have helped propagate the notion that everyone can make money on the markets. And perhaps you will get lucky and do better than most – after all, you do save on fees if you don’t use an investment manager! But to justify going this route, you don’t just have to outsmart the market over thirty or forty years, you also have to match the imposed discipline of a retirement fund and the tax breaks it affords investors.

Tax free deductions and investment returns can increase the value of your retirement savings substantially. And you score again because your retirement income is almost always taxed at a lower average rate than the marginal tax you saved on your contributions.

Assuming you diligently contribute to your savings (despite any budget deficit) and you do resist the temptation to dip into your account every now and again (despite the absence of regulatory shackles), it will still take an enormous amount of skill and luck to overcome the tax disadvantage.

Insufficient diversification

Remember the old chestnut, “Don’t put all your eggs in one basket”? Investors should heed this advice, because insufficient diversification is a sure route to stress and regret. There are many ex-equity-only pundits who at some point wished they also owned bonds and property shares.

The textbooks will tell you that a diversified portfolio, re-balanced regularly, is likely to deliver a higher return with less risk than a concentrated portfolio. A diversified portfolio combines a variety of different asset classes, securities and currency exposures to reduce the overall riskiness of your portfolio (provided the investments do not all move in tandem).

If you are over-invested in one asset class or security, you assume concentration risk, the risk that one investment will have a disproportionate impact on your savings outcome. This can work for you or against you. Of course, with hindsight, we regret not having put all our money into the Apple basket twenty years ago. But by the same token you could also have bought soaring shares that nose-dived abruptly in the following years.  

As a retirement investor, you cannot afford the downside risk, as it may ruin your pension. Remember, it’s about reaching your goal with the lowest possible risk; it is not about speculating your way to a dream retirement. If you want to leverage 10X's decades of experience in retirement investments, get in touch. There are no call centres here, just passionate humans ready to help.

Chopping and changing your investments

This amounts to a buy-high sell-low strategy, which is the well-travelled road to investment failure.

As investment choice has become ubiquitous in South African retirement funds (the ability to choose among a selection of funds, investment styles and investment strategies in the belief that one will meet your very own specific needs at a particular time), choice has become a curse rather than a cure as it tempts you to do the wrong thing at the wrong time.

Stuck in bumper-to bumper traffic on the highway, we see the other lane is moving faster, but we think it’s temporary. But it keeps moving ahead, so eventually we succumb and move across. It is usually around this time that this lane shudders to a halt, and your original lane accelerates. At first, you think it’s only temporary…and so it carries on. Sound familiar? 

Humans tend to bring the same approach to their investments. Despite our good intentions, we are wired to ditch what has done badly, and to embrace what has done well. Fund managers are hired and fired that way, asset managers market their funds that way and brokers recommend investments that way. It takes a disciplined person (or one tied to the proverbial mast) to withstand the lure.

But invariably, what has done well is now fully priced, and what has done badly offers good value.

Studies show that performance persistence is rare; only investors with strong investment beliefs and a clearly defined investment policy, who rigorously stick to their script, are likely to prevail over the long term. Is that you? Even if you're confident, it makes sense to see what a low-cost, proven benchmark out-performer like 10X could offer you.

Trying to time the market

Market timing is the intellectual cousin of switching. And it’s another self-defeating habit. Yes, we can learn to identify markets that appear cheap or expensive, but we’d be fooling ourselves if we believed we could accurately predict market turns.

And that is what really counts, because markets tend to run longer and rally sooner than we expect.

Market timers typically get out too soon, and get back in too late. The latter is particularly harmful as a large percentage of gains happen within the first few days or weeks of a rally, when sentiment is still hugely bearish, and a market rally is dismissed as a dead-cat bounce (which sometimes it is, and sometimes it isn’t).

But missing the first move makes it almost impossible to match the average market return, let alone exceed it – long term investors would then have been much better served with a simple “buy and hold” strategy. Studies in the US have compared net fund returns with the average net investor returns; investors typically lag by around 3% per year, because they believe they can time markets.

The above behavior assumes that we apply market timing with a hint of analysis. Unit trust flows suggest that the average DIY market timer does not even do that. Instead they are lagging momentum investors who invest after markets have gone up, and sell after they have come down. 

Not doing your sums early

None of the above is particularly new and insightful; in fact most of it is repeated ad nauseum in the financial media and in retirement fund literature.

The reason many of the above mistakes persist is because so few take an active interest in their pension savings until retirement looms. It doesn’t have to be this way. Right now, you can see what you have saved, and develop a plan to save what you’ll need. At 10X, we make this easy. Use our retirement annuity or preservation fund calculator, or get a free comparison report to see how your investments stack up.

The point is that you can take control (and you don’t need to pay an advisor to help you). Understanding the basics laid out in this article will stand you in good stead for the retirement you deserve.