How investing expenses and poor market timing chew away at your savings
Three of the biggest enemies for investors are investing expenses, failed market timing events and poor diversification. A recent Money Magaine article takes a look at how the first two can mangle your retirement savings. Here’s the lowdown.
Suppose you have a $1 million portfolio consisting of a mix of 50% stocks and 50% bonds. If that portfolio is beating inflation by at least 3.5% a year then you can safely pull out about $40,000 a year to live on.
Unfortunately since most mutual funds carry trading expenses of 1-2% that accrue each year the amount you safely withdraw drops to $31,000.
But what happens if we hit a rough bear market like the one we are currently in? Investors grab their money and head for the hills causing the price of stocks to decline. Investors then rush back into the market when they think things are getting better. Unfortunately, most of these attempts to time the market are poor at best. On average investors will actually lose 1.5% by trying to time the market. And your safe withdrawal rate now drops to $26,000.
The article wraps up by suggesting two two ways to reduce your costs and losses and bring your safe withdrawal rate up to $39,200.
1. Invest in exchange traded funds (ETFs) to reduce expenses.
2. Stick to a long term plan and rebalance regularly to avoid market timing mistakes.
I firmly support both of these conclusions and wish that my 401 would allow investing in ETFs.
