To have a comfortable retirement, it's no longer enough just to put away an adequate amount on a regular basis while you're still working. You also have to do it smartly and then manage it smartly. At a minimum, that means not doing stupid things that can turn a nest egg into a scrambled egg.
A lot of this is common sense, and common sense can go a long way in the investment world. But sadly, that world is also full of many examples where that was in short supply.
To a large extent we're talking here about behavioral finance. That's the notion that adverse economic performance can be caused not only by such classic elements as poor profits, but by more elusive factors stemming from psychological quirks on the part of investors. They make irrational decisions based not so much on misreading the facts before them as by not confronting their own hubris and fears.
A number of experts have blamed such mental factors for the bubbles and busts that have plagued mankind since the 17th century, when, during the Tulip Mania, ordinary citizens bid up the price of a single tulip bulb in Holland to 10 times the average income of a worker. Of course, the prices soon collapsed.
Academics and experts in this very interesting field have identified a number of reasoning errors that investors make. They are too risk-seeking or too risk-averse. They are so averse to taking losses that they avoid obvious opportunities for making gains. They have a high opinion of themselves as an investor not consistent with reality. They engage in mental accounting--viewing investments one by one instead of seeing the big picture and how they perform in relation to one another.
A major goal of the investor should be to fight the demon biases that get in the way of viewing the facts for what they are.
There's also the issue of fighting against investing laziness. Such errors are legend: keeping everything in stocks, or, even worse, putting all in one stock, and maybe one recommended by your barber. That potentially could be a hedge against inflation--which fixed income investments are not. But the lack of diversification raises the level of risk from under-performance to a plateau unacceptable for persons nearing or in retirement.
For the list of 20 Ways To Lose Your Nest Egg, click here.
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