5 Investing Mistakes Retirement Plan Participants Can Make

1. Making poor initial elections

Studies have found that more than 60 percent of unadvised participants made incorrect initial allocations based on their ability to bear risk. In addition, many participants believe that proper diversification is achieved by allocating the same percentage to every fund in the plan.

2. Listening to the “crowd”

Confirmation bias causes us to actively seek information that confirms what we already believe. We feel better knowing that we all are doing the same thing. Many employees will check their thinking with their friends or coworkers to find out how they are investing.

3. Forgetting to rebalance

In bull markets, most participants’ equity allocations become too high. Not rebalancing results in participants taking more risk. This becomes apparent when markets fall and participants are shocked at how much their account balance has decreased.

4. Letting emotion cloud the decision

Have you ever heard somebody say “I've always owned this fund” or “ What got me here will keep me here”. Unfortunately, that investment might be too risky or not a great fit. It’s hard to admit that we've made a mistake and make a change especially when we make bad investment decisions.

5. Buying high and selling low

This is especially common in volatile markets. Because we listen more to our emotions than our brains. We get greedy, then we get scared. And we have to make that important investment decision right now before things get worse (or that investment moves any higher without us).