7 Biggest Investment Mistakes Investors Make

MISTAKE #1

TIME HORIZON TOO SHORT:

Correction Time: The Market Takes a Hit

After reaching all-time highs on January 26, 2018, the Dow Jones Industrial Average and the S&P 500 went into a two-week slide that saw both stock indexes drop by more than 10%, a decline that is typically considered a market correction.1

Analysts have been saying for several years that the long, booming bull market was overvalued and due for a correction, so the drop was not a surprise in the big picture.2 And even after the 10% plunge, the Dow was up 19% over the previous 12 months, and the S&P 500 was up 12.5%.3

It's natural to be concerned about this kind of shift, but more important to maintain perspective and focus on your long-term goals. It may be helpful to consider some of the reasons behind the surge of market volatility.

Too Much of a Good Thing?

The initial trigger for the downturn was a better-than-expected jobs report on February 2 that helped drive the Dow down more than 2.5%, a significant decline considering the unusually low volatility in 2017 and the beginning of 2018. The economy added 200,000 jobs in January, marking the 88th straight month of job creation, the longest such run in U.S. history. Wages rose by 2.9% over the previous January, the highest year-over-year increase since the end of the recession in June 2009. And the unemployment rate held steady at 4.1% for the fourth straight month, the lowest level in 17 years.4

Although the report was great news for U.S. workers, on Wall Street the rosy jobs picture generated fears of higher inflation that might drive the Federal Reserve to raise interest rates more quickly than anticipated. At its December 2017 meeting, the Federal Open Market Committee signaled its intention to raise the benchmark federal funds rate three times in 2018, bringing it up to a range of 2.0% to 2.25%. Theoretically, these changes have been priced into the market, but the strong jobs report made it more likely that the Fed will follow through on its projection and possibly execute further increases if inflation heats up.5

Stocks, Bonds, and U.S. Debt

Higher interest rates rattle the stock market because investors are more likely to move assets out of risky stocks and into more stable bonds, as fixed-income yields become more attractive. Higher rates not only mean increased yields on new bonds but also on existing bonds, as prices are pushed downward to make yields competitive. In addition, the prospect of inflation tends to push bond prices lower and yields higher, because inflation erodes the purchasing power of fixed-income payments.

One reason for the initial reaction to the January jobs report expanding into a full-blown correction is that bond yields were already rising due to other factors. The yield on the 10-year Treasury note — a bedrock of global financial markets — has been rising since tax legislation was proposed in the fall of 2017, and the yield reached a four-year high of 2.85% on the day the jobs report was released.6–7 Although the Tax Cuts and Jobs Act was generally welcomed on Wall Street, bond traders have been concerned that increased Treasury sales to pay for the $1.5 trillion tax cuts will erode bond prices. This concern was exacerbated by the bipartisan budget deal that further increased deficit spending.8

The Treasury is working to finance higher debt at the same time the Federal Reserve is unwinding its recession-era bond-buying program. With the Fed reducing its bond portfolio, the Treasury must sell more bonds to the public to cover growing deficits. The Treasury recently announced the first increase in bond sales since 2009.9

The question is who will buy these bonds and what are they willing to pay for them? A weak dollar has made Treasuries less appealing to foreign governments, which hold more than 44% of U.S. government debt. With the Treasury market depending more on U.S. investors, supply may be outpacing demand — illustrated by a tepid Treasury auction on February 7.10

The Long View

Although mounting government debt is a serious concern, the stock and bond markets are both driven in the long term by the economy, and the United States looks to be hitting its stride after a long, slow recovery. The global economy, which has been even slower to recover, is coming back as well.

A correction may be disturbing, but it can strengthen the market in the long term by returning equity values to levels that are more in line with corporate earnings and less dependent on investor exuberance. A corrected market may also be less vulnerable to overreaction. On February 14, the Dow and the S&P 500 closed up more than 1.2%, despite a consumer report that showed higher-than-expected inflation. Even with higher prices in January, core inflation (which excludes food and energy prices) is running at only 1.8%, still below the Fed's 2% target rate.11

Of course, no one can predict the future, and you might see volatility for some time. The wisest course may be to remain patient and avoid making portfolio decisions based on emotion.

The return and principal value of stocks and bonds fluctuate with changes in market conditions. Shares, when sold, and bonds redeemed prior to maturity may be worth more or less than their original cost. U.S. Treasury securities are guaranteed by the federal government as to the timely payment of principal and interest.

The S&P 500 is an unmanaged group of securities that is considered representative of the U.S. stock market in general. The performance of an unmanaged index is not indicative of the performance of any specific investment. Individuals cannot invest directly in an index. Past performance is no guarantee of future results. Actual results will vary.

1, 3) Yahoo! Finance, 2018 (Dow Jones Industrial Average and S&P 500 index for the period 2/8/2017 to 2/8/2018)
2) Bloomberg, February 6, 2018
4–5) The Wall Street Journal, February 2, 2018
6) CNBC, January 11, 2018
7) CNNMoney, February 2, 2018
8) MarketWatch, February 12, 2018
9) Bloomberg, January 31, 2018
10) Bloomberg, February 7, 2018
11) MarketWatch, February 14, 2018

 

This information is not intended as tax, legal, investment, or retirement advice or recommendations, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Broadridge Advisor Solutions. © 2018 Broadridge Investor Communication Solutions, Inc.

 

MISTAKE #2

ACCOUNTS NOT COVERED BY WILL OR TRUST:

Where There's a Will...

A 2017 survey found that only 42% of U.S. adults — and only 36% of those with children under age 18 — had a will or a living trust.1 (A living trust can serve some but not all functions of a will; you should have a will even if you have a trust.)

The most common reasons given for not taking this simple step are procrastination and not having enough assets.2 In fact, creating a will does not have to be difficult or time-consuming, and everyone should have one regardless of his or her assets. Here are three good reasons.

 

Distribute property. A will enables you to leave your property at your death to anyone you choose: a surviving spouse, a child, other relatives, friends, a trust, or a charity. Transfers through your will take the form of specific bequests (e.g., heirlooms, jewelry, or cash), general bequests (e.g., a percentage of your property), or a residuary bequest of what's left after your other transfers. It is generally a good practice to name backup beneficiaries.

Your spouse may have certain rights with respect to your property, regardless of the provisions in your will. Also, assets for which you have already named a beneficiary pass directly to the beneficiary (e.g., life insurance, pension plans, IRAs).

Appoint a guardian. In many states, a will is the only way to specify who you want to act as legal guardian for your minor children if you die. You can name a personal guardian, who takes personal custody of the children, and a property guardian, who manages the children's assets. This can be the same person or different people.

Name an executor. A will allows you to select an executor to act as your legal representative after your death. An executor carries out many estate settlement tasks, including locating your will, collecting your assets, paying legitimate creditor claims, paying any taxes owed by your estate, and distributing any remaining assets to your beneficiaries.

Though it is not a legal requirement, a will should generally be drafted by an attorney. There may be costs involved with the creation of a will or a trust, the probate of a will, and the operation of a trust.

1–2) Caring.com, 2017

 

This information is not intended as tax, legal, investment, or retirement advice or recommendations, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Broadridge Advisor Solutions. © 2018 Broadridge Investor Communication Solutions, Inc.

 

MISTAKE #3

NOT AWARE OF YOUR BASIC NUMBERS:

Four Financial Numbers You Should Know

Daily life is full of numbers, and some matter more than others. Here are four that could help you understand and potentially improve your financial situation.

Retirement Plan Contribution Rate

What percentage of your salary are you contributing to a retirement plan? Making automatic contributions through an employer-sponsored plan is a convenient way to save for retirement, but this out-of-sight, out-of-mind approach may result in a disparity between what you need to save and what you are actually saving. There is no magic number, but one common guideline is to save 10% to 15% of your salary. If you start late, you may need to save even more.

If that seems like too much, you should at least contribute enough to receive the full company match (if any) that your employer offers. Some plans let you sign up for automatic increases each year, which is a simple way to bump up the percentage you're saving over time.

Credit Score

When you apply for credit, such as a mortgage, a car loan, or a credit card, your credit score will likely factor into the approval decision and affect the terms and the interest rate you'll pay.

The most common credit score is a FICO® Score, a three-digit number that ranges from 300 to 850. At one time, you had to pay to check your score, but many credit-card companies now offer this as a free service to customers. You should also regularly check your credit report, which contains the information used to calculate your score. You're entitled to one free copy every 12 months from each of the three major credit-reporting agencies. To request a free report, visit annualcreditreport.com.

Debt-to-Income Ratio

Your debt-to-income ratio (DTI) is another number that lenders may use when deciding whether to offer you credit. A DTI that is too high might mean that you are overextended. Your DTI is calculated by adding up your major monthly expenses and dividing that figure by your gross monthly income. The result is expressed as a percentage. If your monthly expenses total $2,000 and your gross monthly income is $6,000, your DTI is 33.3%.

Lenders decide what DTIs are acceptable, based on the type of credit. For example, a ratio of 43% or less is standard for many types of mortgages, but the percentage might be more or less depending on the specific situation.1

Once you know your DTI, you can take steps to reduce it if necessary. You may be able to pay off a low-balance loan to remove it from the calculation and/or avoid taking on new debt that might negatively affect your DTI. Check with your lender if you have questions about acceptable DTIs or what expenses are included in the calculation.

Net Worth

Your net worth provides a snapshot of where you stand financially. To calculate your net worth, add up your assets (what you own) and subtract your liabilities (what you owe). Ideally, your net worth will grow over time as you save more and pay down debt, at least until retirement.

If your net worth is stagnant or even declining, then it might be time to make some adjustments to target your financial goals, such as trimming expenses or rethinking your investment strategy.

1) Consumer Financial Protection Bureau, 2017

 

This information is not intended as tax, legal, investment, or retirement advice or recommendations, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Broadridge Advisor Solutions. © 2018 Broadridge Investor Communication Solutions, Inc.

 

MISTAKE #4

QUIT COLD TURKEY:

Phasing Out...or Practice Makes Perfect

In late 2014, the federal government launched a formal phased retirement program that allows eligible employees to work part-time in their positions while collecting half of their salary and half of their pension. Typically, at least 20% of their remaining work hours must be spent mentoring younger workers. And their pensions continue to grow based on part-time work.1

This kind of arrangement can make it less stressful to transition into retirement, and it benefits employers by leveraging the knowledge of experienced employees. However, private industry has been slow to adopt similar programs, despite widespread employee interest. A 2017 survey found that almost half of large employers believe many of their employees want a phased retirement program, but only 31% of employers allow full-time workers to switch to part-time, and only 24% allow them to transition into retirement through a less stressful or demanding position.2

Another study found that only 6% of employers offered a formal phased retirement program in 2017. However, 13% offered an informal program that provided flexibility to negotiate with specific employees. While the number of formal programs remained flat from 2013 to 2017, the percentage with informal programs has grown steadily.3

Build Your Own Program

If your company does not offer a phased retirement program, you might suggest an arrangement. Emphasize what you can continue to contribute and how it could help the company in the present and the future. But also be sure that the program will really work for you. Here are some ideas to keep in mind.

  • Make sure you understand the effect of reduced hours on your benefits, such as health insurance and employer pension or retirement plan contributions. 
  • The federal program includes a half pension with part-time wages, but pensions are less common in private industry, so you may have to use other sources to supplement the lost income.
  • If you claim Social Security before full retirement age (FRA) and continue to work, you will receive a permanently reduced benefit (for claiming early) and will be subject to the retirement earnings test, which may temporarily reduce your benefit payments until you reach FRA. Once you reach FRA, any earnings will not affect your Social Security benefits. 
  • A moderate phaseout program, such as working four days instead of five, might allow you to try living on 80% of your income without tapping other sources, which could be good practice for retirement.
  • If you do phase out of your current job, make sure you don't end up trying to do all of your former work in fewer hours!

Take a Test Run

If a phased retirement is not available or appropriate for your situation, you might test the waters by living on your projected retirement budget for six months or a year before making the decision to retire.

You could even set up two separate bank accounts: one for the expenses you anticipate in retirement and another for expenses that you may no longer have when you retire (for example, commuter expenses or a mortgage that you expect to pay off). Put only the amount of retirement income you expect to have into the "retirement account" and see whether you can live comfortably on that income. If not, you might have to adjust your spending or work longer to increase your savings and Social Security benefits.

If you plan to move to a different part of the country when you retire, it may be difficult to simulate your retirement lifestyle while maintaining your current job. In that case, you might take an extended vacation and try living for a time in your planned retirement community.

Retirement should be a time for fun, relaxation, and new experiences after a long working career. By phasing out or trying a practice run, you may be more comfortable as you move into a new stage of your life.

1) Federal News Radio, June 28, 2017
2) Transamerica Center for Retirement Studies, 2017
3) Society for Human Resource Management, 2017

 

This information is not intended as tax, legal, investment, or retirement advice or recommendations, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Broadridge Advisor Solutions. © 2018 Broadridge Investor Communication Solutions, Inc.

 

MISTAKE #5

NOT UNDERSTANDING TAX RAMIFICATIONS:

Business Tax Breaks: Impact on Earnings
and the Economy

The Tax Cuts and Jobs Act, a $1.5 trillion tax cut package, was signed into law on December 22, 2017. The following changes are intended to put the tax treatment of U.S. businesses on more equal footing with their global competitors and to spur business investment in the United States that could drive up economic growth.

Corporate Tax Rates

Instead of the previous graduated corporate tax structure with four rate brackets (15%, 25%, 34%, and 35%), the new legislation establishes a flat corporate rate of 21% and repeals the corporate alternative minimum tax (AMT). These rates are permanent and take effect in tax year 2018.

Cutting corporate taxes should help many businesses grow their earnings, but not all companies and industries will benefit to the same extent. That's because businesses use deductions and expenses to reduce their tax bills, and their effective tax rates vary significantly.

Foreign Income

Under previous corporate tax rules, U.S. companies were taxed on worldwide profits, with a credit available for foreign taxes paid. If a U.S. corporation earned profit through a foreign subsidiary, however, no U.S. tax was typically due until the earnings were returned to the United States. This system contributed to some domestic corporations moving production overseas, and incentivized multinationals to keep profits worth roughly $2.5 trillion outside the United States.1

The new corporate tax law shifts to a more territorial approach in which qualifying dividends from foreign subsidiaries are effectively exempt from U.S. tax. However, companies must pay U.S. tax on prior-year foreign earnings that have accumulated in foreign subsidiaries since 1986. Deferred income held as cash will be immediately taxed at a 15.5% tax rate; real estate and other nonliquid assets will be taxed at 8%.

After the one-time deemed repatriation payment is made, foreign earnings can be brought back to the United States with no additional tax liability. 

Pass-Through Deduction

About 95% of U.S. businesses are pass-through companies that do not pay taxes at corporate rates. Profits flow to the owners, who report the net income on their individual income tax returns and pay tax at individual rates.2 Individual rates were also reduced, but only for tax years 2018 through 2025, and to a lesser degree than corporate rates.

Taxpayers who receive pass-through income may be able to take a new deduction equal to 20% of their qualified business income. Those with taxable incomes up to $157,500 ($315,000 if married filing jointly) generally may claim the full deduction, and those with taxable incomes between $157,500 and $207,500 ($315,000 and $415,000 for joint filers) may be able to claim a partial deduction.

When taxable income exceeds $157,500 ($315,000 for joint filers), the deduction may be limited or eliminated altogether. For example, high-earning professionals in fields including health, law, accounting, actuarial science, performing arts, consulting, athletics, and financial services are generally not allowed to take the deduction.

Also, the deduction is generally limited to the greater of 50% of the W-2 wages reported by the business, or 25% of the W-2 wages plus 2.5% of the value of qualifying depreciable property held and used by the business to produce income. This means larger businesses without employees could miss out on the deduction.

Like other tax law provisions affecting individual taxpayers, this deduction is scheduled to expire after 2025.

Investment Write-Offs

Section 179. Small businesses may elect to immediately expense the cost of certain short-lived capital investments ("qualified property") rather than recover costs over time through depreciation deductions. The new law increased the maximum amount that can be expensed in 2018 from $520,000 to $1,000,000, and the threshold at which the maximum deduction begins to phase out from $2,070,000 to $2,500,000. After 2018, both amounts will be adjusted annually for inflation. The range of property eligible for expensing has been expanded.

Bonus depreciation. For qualified property that's both acquired and placed in service after September 27, 2017, 100% of the property's adjusted basis can be deducted in the year the property is first placed in service. The first-year bonus depreciation percentage will be reduced to 80% in 2023, 60% in 2024, 40% in 2025, and 20% in 2026, until it is eliminated altogether beginning in 2027.

Economic Stimulus

Companies may use their tax savings to reduce debt, make capital investments, acquire other companies, pay dividends to investors, or buy back shares. Capital spending has the power to influence economic growth more directly, so any future benefits might depend on how much of the tax windfall is reinvested. U.S. corporations may be in a stronger position to pursue growth opportunities and spend capital in ways that drive up productivity, create more jobs, and raise wages.

Thus, the tax bill has the potential to provide a moderate economic boost, at least in the short run. The Tax Foundation projects that the reforms will add about 0.3% to annual gross domestic product growth over the next decade; Moody's Investors Service estimates a modest increase of 0.1% to 0.2%.3–4 Some economists are less confident in the bill's longer-term economic effects, partly because the Federal Reserve could decide to raise interest rates more quickly if inflation heats up, putting the brakes on growth.5

1) CNBC.com, July 13, 2017
2) Bloomberg.com, November 15, 2017
3) Tax Foundation, December 2017
4) Moody's Investors Service, December 2017
5) The Wall Street Journal, December 13, 2017

 

This information is not intended as tax, legal, investment, or retirement advice or recommendations, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Broadridge Advisor Solutions. © 2018 Broadridge Investor Communication Solutions, Inc.

 

MISTAKE #6

TOO MUCH IN MONEY MARKET FUNDS:

Why Hold Money Market Mutual Funds?

After six years of near-zero returns, the yield on money market mutual funds began to edge upward in 2016, with 30-day taxable funds returning 0.13% for the year. This may not sound like much, but it's a big jump from the 0.01% to 0.03% yield during the 2010 to 2015 period.

The uptick continued in 2017, with a 0.15% return for the first nine months of the year (see chart). Even with the recent increase, which reflects the Fed's efforts to raise short-term rates, the return on these mutual funds is so low that it might not seem worth investing. Yet at the end of Q3 2017, investors held more than $2.7 trillion in money market funds.1 What's the appeal with such a low return? In two words: stability and liquidity.

Cash Alternatives

Money market funds are mutual funds that invest in cash-alternative assets, usually short-term debt. They seek to preserve a stable value of $1 per share and can generally be liquidated fairly easily. Money market funds are typically used as the "sweep account" for clearing brokerage transactions, and investors often keep cash proceeds in the fund on a temporary basis while looking for another investment. They can also be useful to keep emergency funds.

For long-term investing, however, money market funds are a questionable choice. You might keep some assets in these funds to balance riskier investments, but low yields can expose your assets to inflation risk — the potential loss of purchasing power — along with the lost opportunity to pursue growth through other investments. This could change if interest rates continue to rise, but the Fed seems committed to a gradual approach that will keep rates relatively low for some time.2

Money market funds are neither insured nor guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although money market funds seek to preserve the value of your investment at $1 per share, it is possible to lose money by investing in such a fund.

Mutual funds are sold by prospectus. Please consider the investment objectives, risks, charges, and expenses carefully before investing. The prospectus, which contains this and other information about the investment company, can be obtained from your financial professional. Be sure to read the prospectus carefully before deciding whether to invest.

1) Investment Company Institute, 2017
2) Federal Reserve, 2017

 

This information is not intended as tax, legal, investment, or retirement advice or recommendations, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Broadridge Advisor Solutions. © 2018 Broadridge Investor Communication Solutions, Inc.

 

MISTAKE #7

TAKE SOCIAL SECURITY TOO EARLY OR TOO LATE:

New Math for Social Security

In 2017, Americans born in 1955 become eligible to claim Social Security benefits at age 62. Claiming benefits before reaching full retirement age results in a permanently reduced benefit, so it requires careful consideration. But for those born in 1955 or later, the math for claiming at any age is different than it was for older age groups.

The shift dates back to the Social Security Amendments of 1983, which made numerous changes to strengthen the program fiscally, including a gradual increase in the full retirement age (FRA) from 65 to 67. The first phase of this increase resulted in a FRA of 66 for those born in 1946 to 1954. For those born in 1955, FRA is 66 and two months, with an additional two months added for each successive birth year until full retirement age reaches 67 for those born in 1960 or later (see chart).

Although some people may think this is unfair, average lifetime benefits should be similar for each age group due to increasing life expectancies and longer working careers.

Claiming Early or Late

The minimum and maximum claiming ages remain at 62 and 70, respectively. However, because Social Security benefit calculations are based on full retirement age, the change affects the benefits paid at all claiming ages before or after full retirement age.

For example, whereas someone born between 1946 and 1954 who filed at age 62 would have received 75% of the full benefit, someone born in 1955 would receive only 74.17% of the full benefit at age 62. This percentage will be reduced gradually until it reaches 70% for those born in 1960 or later.

Delayed retirement credits for working past full retirement age will remain the same, increasing the benefit by 8% each year. However, as FRA increases, the amount of time to earn credits will decrease. Someone with a full retirement age of 66 could earn four years of credits before claiming at age 70, and would potentially receive a benefit equivalent to 132% of the full benefit amount. However, someone born with a full retirement age of 67 would have only three years between FRA and age 70, so the maximum benefit would be 124% of the full benefit amount.

Social Security rules are complex, so be sure to research your options before making a decision on when to claim benefits. Seehttps://www.ssa.gov for further information.

 

This information is not intended as tax, legal, investment, or retirement advice or recommendations, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Broadridge Advisor Solutions. © 2017 Broadridge Investor Communication Solutions, Inc.

 

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