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It has often been said that having a successful retirement plan is a 50-50 proposition. No, that doesn’t mean that your chances of success are a coin toss. It means that the plan you need for a successful retirement strategy follows a 50-50 rule. One half of your success will come from understanding basic investment concepts and the other half of your success will come from not doing anything stupid. Learning the basic concepts is easy; you can find them in any standard investment text. The hard part is to keep yourself from acting foolishly while executing your plan. While no one tries to wreck their retirement plans, many people often do just that by following investing rules that are counter to their best interests. If you want to have a program that will make the chance of achieving your dreams difficult just follow some of these common errors. Don’t diversify. That’s right. Try to find one great investment and make a big wager on its outcome. If that’s too much risk for you concentrate all of your investments in one narrow sector of the marketplace. Don’t spread your money across various asset classes. Don’t have a proper allocation to fixed income. Don’t have any global diversification. Concentrate all of your portfolios in narrow risky positions. If you have the ability to choose correctly you’ll have a fantastic retirement, if you are wrong you can always work into your 80s. If having a concentrated portfolio doesn’t work well for you try switching investment styles until you find one that does? If you have a passive index strategy that doesn’t seem to excite you, switch to an options trading strategy. If you don’t find that to be successful, you can always use technical analysis while switching back and forth between point and figure and bar charting techniques. You could also try forecasting correct rotation for sector timing strategies. Try futures and currencies in you can’t find a good equity strategy. Just try to make sure that you find one that works before too many years go by. You can always fall back upon the old favorite strategy that went out of popularity after the dot-com debacle of five years ago. Chase what’s hot. Sure, don’t get left behind. The energy stocks are flying; why not go along for the ride? Tech stocks are making a big move; load up on them, gold stocks, pharmaceuticals, whatever is making the most news are what you should be chasing. This is often referred to as the greater-fool theory of investing. Just make sure that you are not the last person looking for a chair when the music stops. Don’t take into consideration how much you are paying in costs. What is the difference in a percent or two in fund expenses when you are investing with some of the best managers in the world? If you are happy with your managers performance there is no need to try to find similar performance at a lower expense, is there? Ignore the fact that by saving one percent in costs over a 30-year period your retirement portfolio will have a final value thirty percent larger than if you hadn’t cut those expenses. If you don’t care about minimizing fund expenses there is probably no good argument for you to watch your other expenses. Don’t worry about minimizing transaction costs and certainly don’t take into consideration any of the tax consequences from high-volume trading. Be patient with your hot-stock picks, and let your losers have plenty of time to make a comeback. Don’t sell an ill-timed investment simply to harvest the tax loss. If you don’t sell it at a loss, it isn’t really a loss, is it? Just because the IRS always wants to be your partner when you have a profit it doesn’t necessarily follow that they should share in your losses, does it? Wait to get even before you sell anything. That JDS Uniphase you bought at $300 that is now trading at $15.15 has to come back some day! Buy safe municipal bonds for the bulk of your portfolio. You don’t have to pay any taxes. This seems reasonable to want to minimize your taxes. So what if municipal bonds only earn a little over inflation over the long term, they’re guaranteed. They are guaranteed to return your investment, not to make you rich. Oh, by the way, when you use this strategy make absolutely sure that you never have any intention of moving to another state. You should plan on not moving your residence in retirement or through a job transfer. You might have some big surprises when you try to sell your municipal bond portfolio and reinvest the proceeds in your new home states securities. Items like large spreads from the dealers and capital gains taxes for Uncle Sam. Try timing the market to make additional returns. You don’t need to be satisfied with earning the capital market rates of return. It looks so easy to earn additional returns by simply anticipating the direction of the next major move in the markets. To do this correctly you only have to sell all of your investments when you think the risk is too high. Then, at precisely the right moment, put your money back in. However, don’t do like many timing services suggested and have your money sitting out of the tail end of the great bull market (1997-1999) and then fail to put it back to work in time to capture the highest returns in the last 30 years (2003) After you’ve made your initial allocations to stocks and fixed income, let them ride for decades and don’t rebalance them. Just because you are getting closer to retirement doesn’t mean that you should carefully monitor your risks. Don’t worry that your allocation to equities has grown from 50 to 80 percent of your portfolio and your risk has significantly increased. If one of the goals for your portfolio is not to maintain a disciplined asset allocation, don’t rebalance. It takes too much effort. Don’t maximize the contributions to your company sponsored retirement plans, like 401(k)s. Spend your money for things that you really want today. Don’t take advantage of your generous employer match, and tax deferment. If you have to make the hard decision between buying a swimming pool and saving for some distant retirement, go for the new pool. If you choose this path, you will probably want to assume that all of your Social Security benefits will be available for you when you retire. You’d better also assume that there will be no reduction in the promised benefit amount. Assume future changes in Social Security won’t extend your retirement age. They won’t make you work longer than you planned, or tax more of your earnings than they do currently. While you are looking at the bright side of life you should assume that you’ll never get ill and that long-term care insurance is not a benefit to you. If you want to increase the chances of ruining your retirement plans following one or two of these common errors just might be the ticket. If the circumstances unfold correctly, any one of these mistakes might be enough to change your future. If you follow three or four of these errors, I am highly confident that your retirement will be less that you hoped it to be. If you follow six or more of them, I can guarantee it. Remember, half the success of investing comes from having an understanding of the basic concepts and half from not making big mistakes. William Z. Suplee IV is the president of Structured Asset Management Inc., a financial planning and investment advisory firm located in Paoli, Pa. He may be reached at 610-648-0700 or [email protected].

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