Tinkering with your retirement accounts costs you money, Hamm writes, and looking at your retirement accounts makes it tempting to tinker.
Vitaly writes in:
My problem is that I can’t stop looking at my retirement accounts. Whenever I see an investment option that’s doing a little bit better than whatever I’m doing, I start to feel sick to my stomach and I panic and I have to switch my investments over. Then a week later I see something else that’s doing a little bit better.
There’s no tax implications for this because it’s all inside my retirement account. Still, I feel like I’m obsessing and not really gaining anything.
Your suspicion is right. With all of this switching around, you’re probably not gaining much at all and you’re likely losing compared to just sticking with a small portfolio of investments.
Here’s what I would suggest doing. Go back and see how much you earned in returns in 2012. Ideally, your investment house will help you with this kind of calculation. Then, compare that percentage return to what you would have earned just sitting in some of the investment options.
What you’ll probably find is that your annual return is pretty close to the returns on a lot of those investments. In fact, I’d bet that your returns are actually lower than most of them.
Why do I think that? The biggest reason is that when you jump from investment to investment chasing the latest bump, you’re likely “buying high,” which means that the investment isn’t going to see the same short-term returns that the investment saw over the earlier period. Also, there might be delays as well as fees in the transactions, which means that there are periods where your money’s not invested at all between the transactions and that some of the money might be swallowed up in the transaction. Many funds require you to hold your purchases for a short period or face fees.
My best advice to you is to stop looking at your retirement accounts. Delete the bookmark from your web browser and clear out your browser’s history. Limit yourself to one peek per quarter and only one change per year.
If you’re ever tempted to look, show yourself those numbers. They’re proof that obsessing over your retirement accounts is directly costing you money.
Before you do that, though, think about and settle on some sort of long-term portfolio. One good suggestion is this “bucket” portfolio that divides up one’s retirement savings into a variety of investments, each with a different risk level. This diversifies the retirement portfolio while spreading out the risk.
Once you’ve figured out the exact portfolio you want – a set of investments that’s diversified, in other words –go into your retirement account and transfer all of your holdings to match that portfolio.
Let’s say you have $200,000 in retirement and you’ve decided to put 15% in investment A, 20@ in investment B, 30% in investment C, and 35% in investment D. You’d fire up your retirement account, put $30,000 in investment A, $40,000 in investment B, $60,000 in investment C, and $70,000 in investment D.
After you do that, close your browser window and don’t look at it for a while. If you’re tempted, look at your 2012 returns and remember that tinkering costs you money, and looking makes it tempting to tinker.
Your contributions should be split up among the investments to match the various percentages you have.
Now, check it at the one year mark and rebalance it. Move the amounts around in such a way that the money is back at the percentages you want. That’s because some investments will gain more than others – but you can’t predict which ones will be the ones that gained the most.
That’s really all you need to do with your retirement accounts, and you’ll likely experience more stable returns this way. Just do this, delete your bookmark and retirement history, and keep the evidence that your activity was costing you nearby. You’ll be glad you did.