Three Investment Mistakes the Trained Eye Can Spot

May 14, 2012

Recently, I had the opportunity to have a series of one-on-one meetings with employees called Ask-a-Planner sessions where the employees could ask me any question on any financial topic they wanted. Fortunately, they didn’t “stump the planner!” Many people used their time as an opportunity to have me review their allocation in their 401(k).  While most of them had an asset allocation that was a fit for them, some of the statements had huge rookie mistake red flags that I’d seen before.

Here they are:

Investing in every single fund in their 401(k) line up. Here is the justification — “I’ve heard diversification is good so I’ll pick them all.” That is not what is meant by diversification – think about it when you look at the mutual fund line up in the 401(k). Many of the funds are equities so the “choose them all” strategy may end up being riskier than the “choosing wisely” strategy.

How to best choose your asset allocation?  Take a risk tolerance quiz to determine your own personal risk profile and based on your time horizon, choose your investment mix from there.  For a link to the risk tolerance profile, click here.  Still unsure?  Choose the target date fund closest to your retirement date.

Owning more than one target date fund. The purpose of the target date fund is to have an “all-in-one” kind of retirement fund where essentially you don’t have to do much!  You choose one fund that aligns up with your retirement date and it contains five or six funds in it so you have instant diversification.  The mix of funds starts out more aggressive and gets more conservative as you get older and closer to your retirement date, and that’s exactly what many people want. That’s why they are so popular! Having three different target date funds doesn’t add any real value – it just dilutes what you are doing.

Owning a high percentage of company stock. Just because you work there doesn’t make you a stock expert! Many people feel a false sense of security owning company stock since they walk in the door of their office every day.  When you work somewhere, you experience the company every day.  That doesn’t mean the stock will go up or the doors will never close.  It is dangerous to think it does.  The guideline for company stock is no more than 10–15% of assets should be in one investment. If you have more, trim it down to diversify.

Some rookie mistakes are easy to spot – when I see one of these, I can tell right away that this employee is trying to do the right thing.  They might just be going about it the wrong way.