Does your investment strategy suffer from these common flaws?

Unless your savings rate is considerably higher than the average American, having enough for retirement will depend in part on you earning a decent average return on your savings. While the recent volatility in the markets makes this challenging, the response of the average investor to these volatile markets may pose the larger problem.

Are your investments too risky?

Inexperienced investors often take on too much risk by failing to diversify. Instead, they examine their investment menu and then invest most, if not all, of their savings in the fund with the highest short-term returns. Unfortunately, top performers one year can be big losers the next. You can protect yourself from the sharpest market fluctuations by ensuring that your portfolio is diversified across a range of investment categories.

Do you panic when the market takes a downturn?

We know that we are supposed to buy low and sell high, but inexperienced investors often do exactly the opposite. We react emotionally to market downturns by stopping our contributions and transferring our holdings into “safe” investments. When the markets recover, we breathe a sigh of relief and dip our toes back in. While this is a very natural response to uncertain market conditions, this behavior often means that we sell at the bottom and then buy back at top dollar. Avoid such errors by picking an investment strategy that considers how soon you will need your money (your investment time horizon) and your ability to tolerate loss and then stick with it.

Have you fallen asleep at the wheel?

While some of us make the mistake of micromanaging our investments, others forget about them entirely. During volatile markets, this can be very dangerous. Young people can tolerate downturns in the market because they don’t need their savings in the short term so their losses are only “paper losses”. As you approach retirement, however, those losses are real because you need to begin making withdrawals. That’s why for most people your investment allocation should change and become more conservative over time. If you haven’t reviewed your investments in awhile, be sure to take a look at least annually. Your account should be rebalanced regularly to correct for market drift and your investment allocation typically should become more conservative as you age.