ETFs: Three Investment Mistakes to Avoid - dummies

ETFs: Three Investment Mistakes to Avoid

By Russell Wild

Even smart investors can make mistakes in managing their portfolios, especially with the strange investment industry products on the market. When working with your ETFs, make sure to avoid these mistakes:

Not save enough for retirement

Compared to spending, saving doesn’t offer a whole lot of joy. But you can’t build a portfolio out of thin air. If your goal is one day to be financially independent, to retire with dignity, you probably need to build a nest egg equal to about 20 times your yearly budget.

Doing so won’t be easy. It may mean saving 15 percent of your paycheck for several decades. The earlier you start, the easier it will be.

Savings come from the difference between what you earn and what you spend. Remember that both are adjustable figures. One great way to save is to contribute at least enough to your 401(k) plan at work to get your employer’s full match, if any. Do it!

Another is to remember that material goodies, above and beyond the basics, do not buy happiness and fulfillment. Honest. Psychologists have studied the matter, and their findings are rather conclusive.

Ignore the IRS’s rules

When they leave their jobs, many employees cash out their 401(k) accounts, thereupon paying the IRS a stiff penalty and immediately losing the great benefit of tax deferral. The government allows certain tax breaks for special kinds of accounts, and you really need to play by the rules or you can wind up worse off than if you had never invested in the first place.

People over 70 ½ must be especially careful to take the Minimum Required Distributions (MRDs) from their IRAs or 401(k) plans. Calculators are available online; simply type “MRD calculator” into your favorite search engine. Unlike a retirement calculator, based on all kinds of assumptions, the MRD is a straightforward equation. Any online calculator can take you there, or ask your accountant or the institution where you have your IRA.

Fail to incorporate investments into a broader financial plan

Have you paid off all your high-interest credit card debt? Do you have proper disability insurance? Do you have enough life insurance so that, if necessary, your co-parent and children could survive without you? A finely manicured investment portfolio is only part of a larger picture that includes issues such as debt management, insurance, and estate planning.

Don’t spend too much time tinkering with your ETF portfolio and ignore these other very important financial issues.