Retirement investing: 7 fatal flubs

By Bankrate.com

While there are never any guarantees in investing, avoiding well-known missteps will better your chances of success on the road to retirement. Let's look at seven of the most common mistakes.

1. Mismatching investments and goals

Need that money for retirement in the next couple of years? Don't put it in a hot emerging-markets fund.

Figure out when you'll need your money. This will help you avoid unnecessary transaction fees, penalties and risks.

• Ready to tap your home equity?

For some goals, such as paying for college, it might make sense to use a mix of investments, says Gail MarksJarvis, author of "Saving for Retirement (Without Living Like a Pauper or Winning the Lottery)."

"If you are saving for college and your child is within three years of going to college, you've still got seven years until that last year of college," she says.

So while the bulk of short-term college savings should probably be kept in CDs, short-term bonds or a high-yielding savings account, maybe some of that money could be invested in stocks. "Just remember the rule of thumb, that money you'll need within five years shouldn't be in stocks," MarksJarvis says.

2. Discounting fees

Fees might sound minuscule at 1% or 2%, but they can gouge your returns by thousands of dollars.

While all mutual funds have expense ratios -- which cover the costs of investment advisory, administrative services and other operations -- some are much higher than others.

To complicate matters, some funds impose sales charges or loads. Load funds are available only through an investment adviser or broker who is compensated with sales commissions.

Picking no-load funds is one way to save money on fees. Instead of going through a broker, call a mutual fund company directly to purchase shares in a fund.

While it might be worth paying a load if you don't have the time or inclination to make your own investment choices, just remember that it's hard, even for a skilled money manager, to make up for those extra fees.

3. Failing to strategize

It's time to pick funds for your 401k lineup. All you do is pick the ones that performed the best, right?

Wrong. Before you research an investment, there are a couple of things to think about. First, plan your strategy by determining what asset classes work best for you, and then pick the investments that are best in those categories.

Next, make sure you're comparing apples with apples. Some funds don't make as much money as others -- by design. A bond fund cannot compete with a stock fund because of the nature of their respective holdings. However, different types of funds serve different purposes. A bond fund, for example, can have a stabilizing effect on a portfolio.

4. Misreading the label

You bought a bunch of different funds, so that means you're diversified, right? Not necessarily. You don't want to find out that you're overexposed to a particular market sector after it hits a rough patch. Luckily, staying out of this trap is a matter of simply reading the label.

Understanding the different types of asset classes will help you strategize. Different asset classes do better at different times. Bonds might do well while the stock market is suffering, and large-cap companies might weather tough times better than spunkier small ones. Boring bonds will never match stocks in a hot market, and small companies might be better poised to take off like a shot than their larger, lumbering counterparts.

5. Neglecting research

Psst. Wanna hear a good stock tip?

No, we're not going to tell you about the next Google (GOOG, news, msgs). We're going to tell you to do your homework. Here's what to look for when you're researching funds:

• Type of fund (large-cap growth, small-cap value, etc.).
• How long the manager has been there.
• How much the fund costs (expense ratio).
• Minimum investment required.
• Portfolio holdings (list of securities).
• Performance information. But remember, past performance does not guarantee future return.

Morningstar, an independent investment-research and ranking site, offers a wealth of free information about mutual funds. Look beyond the star rating, though. Ask for the prospectus from the fund company or brokerage.

Get a copy of the most recent semiannual report (you'll likely find it online).

These reports frequently feature a letter from the portfolio manager. His or her discussion of the past six months will give you an indication of how the fund is run.

6. Ignoring your portfolio

Buy and hold can be a smart strategy, but buy and ignore won't serve you in the long run.

Without reviewing your holdings, you won't know whether your portfolio remains balanced, and you won't shift your holdings to achieve retirement goals or help you cope with changing life events.

Experts differ on how often you need to review your portfolio. Some recommend doing so quarterly or semiannually. Others meet three times a year with clients. But all agree that it's important to review your holdings at least once a year, whether the investments are within a company-sponsored retirement plan or outside of one.

7. Getting emotional

The market is ricocheting all over the place, and when the boss isn't paying attention, you're online buying and selling in a frenzied attempt to dodge the bullets.

Richard Salmen, a certified financial planner and the national president of the Financial Planning Association, describes the all-too-common trap that emotionally driven investors fall into.

"Most people don't earn what the market earns. They invest too heavily in too-risky investments that are doing well, then drop out when they go back down. They take all their money out of tech stocks, for example, put the money into bonds, then put money back in stocks after prices have gone back up," Salmen says.

His prescription is to invest a little bit of money from every paycheck, diversify, then leave it alone.