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4. Paying taxes
Why give Uncle Sam money any earlier than you have to? Instead, put your money to work for you.In the above example, what if the investor bought the same mutual funds in a regular taxable account instead of investing in an individual retirement account?
MarksJarvis explains: "If they earned the same return on their investments, instead of having $540,000, they would end up with about $260,000 because it would be taxed. This again assumes a 10% average annual return, retirement at 65 and a 25% federal tax bracket. Taxes take a huge amount out of the wealth that builds up year after year after year."
People sometimes forget to factor in the upfront tax benefits of 401(k) plans, says Salmen, of the Financial Planning Association. "One of the typical mistakes that I see people making is paying extra on their mortgage but not funding their 401(k) or putting enough into it. Mortgage interest is usually your cheapest interest rate, and there are tax deductions on top of that. Money that you put into a 401(k) you're getting an upfront tax deduction on."
Of course, you'll have to pay taxes eventually -- but not until it's time to take withdrawals from your tax-deferred retirement plan.
5. Failing to strategize
It's time to pick funds from your 401(k) lineup. All you do is pick the ones that performed the best, right?Wrong. Before you research the investment, there are a couple of things to think about. First, plan your investment strategy.
More from MSN Money and Bankrate.com
"For any investment program, sometimes people jump right to the investment they choose," Boston University's Pallaria says. "But they need to determine what asset classes they want to cover before jumping to investments. Once you've got the asset classes, now go pick the investments that are best in these categories."
Next, make sure you're comparing apples to 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. The bond fund can have a stabilizing effect on one's portfolio.
- Talk back: What are your best tips for new investors?
"For example," MarksJarvis says, "someone might have a bond fund that perhaps an adviser put them in because that's supposed to be the safe part of their money. And they'll look at it and they'll say, 'Well, I'm only making 4% in that fund, and I have this stock fund that's up 12%. Why not go with the 12%?'
"Well, there's a perfectly good reason," she says. "That 12% money is not going to be as safe."
6. 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 learning to read the label.
"One of the typical mistakes that people make is they get a list of mutual funds from their employer and they can't tell the difference between them. They don't know the vocabulary," says MarksJarvis.
- Video: The ABCs of mutual funds
Expand your vocabulary by a dozen words and increase your assets: Check out Bankrate's investing glossary.
Understanding the different types of asset classes will help you strategize. Different asset classes do better at different times. Bonds may do well while the stock market is suffering, and large-cap firms may weather tough times better than spunkier small caps. Boring bonds will never match stocks in a hot market, and small caps may be better poised to take off like a shot than their larger, lumbering counterparts.
7. 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.
TAGS: INVESTING - MUTUAL FUNDS - TAX PLANNING - RETIREMENT PLANNING
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