On the day that I write this, the stock market is up (as measured by the S&P500 and Dow Jones Industrial Average). The S&P is on track for a fifth straight session of gains. Yesterday, the Dow closed up, over 200 points and it is currently up another 35 points.

That wasn’t the case about two weeks ago.

All the major indices were down and many pundits were forecasting a pending market correction.

As a result, Kate* got spooked and did what I describe as the unthinkable. Fearful of losing money in her 401k, she sold ALL her mutual fund holdings and parked her proceeds in a money market fund (i.e., cash).

She made a classic 401k investing mistake, one I’ve seen many people make going as far back as the market crash of 1987 and more recently in 2008. The market goes down, some people panic, and the way they react is to sell. They have temporary amnesia and forget that going up and down is what the market does – it’s how it naturally behaves.

Jess took one of my courses and followed my 401k investing instructions almost to a “T.” She made sure she diversified her portfolio, she just went a wee-bit overboard. When she and I started working together 1:1 and I presented my analysis of her portfolio, she was surprised to discover that most of the twenty mutual funds she owned were investing in the exact same companies.

She made another classic mistake when it comes to 401k investing: confusing having many with being properly diversified.

Angela, now in her fifth year at her current employer, hadn’t been paying much attention to the 401ks she left at previous employers. A combination of disinterest and not really knowing what to do, coupled with the fact that her investments were performing pretty well, she just left them where they were – always with the intent of, “I’ll get to it eventually.”

Leaving 401ks with former employers is another classic 401k investing mistake that people make.

I’ll admit: of the three above noted mistakes, Kate’s is the one that most horrifies me.

Selling when the market is down is often considered a way of controlling loses. It’s an action that eases people’s fears the most. Yet, it’s also the one that tends to be the costliest, in the short and long term – especially in a 401k plan.

Because she sold when she did, she did the opposite of one of the primary rules of investing: buy low/sell high. And her initial action to sell and subsequent action of not immediately getting back in the market implies she’s trying to time the market; she’s waiting for an all-clear signal. Truth is, no one can time the market and if a financial professional tells you they can, run in the opposite direction as fast as you can!

All three of the 401k investing mistakes I’ve showcased are examples of you not winning when it comes to investing.

Having more mutual funds than you need results in you being over-exposed to the risk you were attempting to mitigate.

When you leave 401ks with old employers, you usually give up control because you typically can’t make any changes as to how that money is invested.

These three mistakes are reflections of emotions driving money decisions – whether those emotions are fear, over-confidence, or apathy. And when that happens being rational goes out the window and you unwittingly bet against yourself – even though, on the surface, it may look like what you’ve done is in your best interest.

Winning at investing isn’t about what happens during trading hours, it’s the culmination of choices made before, during, and after trading hours. It’s the result of a disciplined approach – one that is personal and rational.

On Monday, 27 October, I’m kicking off a four-part investment training tele-class series, What the Hell Should I Do With My 401k? The goal: to ensure you don’t bet against yourself and make irrational investing decisions that end up costing you big money.

The first session, “To Win at Investing, Don’t Let Your Emotions Get the Best of You,” is also being offered as a free, stand-alone tele-class.

You can click here to learn more.

It’s open enrollment season, which is the perfect time to take a look at your 401k retirement account.

If you don’t know how to select mutual funds or put together a portfolio of funds;

If you don’t know how much to contribute to your retirement account and the funds you select;

If you didn’t get around to enrolling; or

If you’ve been treating your retirement account like you’re a day-trader, I hope you’ll join us for this investment training series.

We start Monday, 27 October. Here’s the link, again, to learn more.



p.s. *all the names are pseudonyms.  

p.p.s. if you have an IRA, SIMPLE-401k or SEP, this series is applicable for you, too.

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