Here are 3 retirement investment “strategies” that will kill your returns and put your retirement goals in jeopardy.
If you’re headed into retirement, you’ve probably read about a range of different retirement investment strategies to follow. One we’ve been asked about a number of times is whether we can supply one last can’t-miss trading idea that can make up for the shortfall in savings (brokers sometimes refer to this as a “rescue stock”).
This, of course, is unrealistic. If we could find stocks with that rare combination of low risk and high potential, why would we ever recommend anything else?
In fact, if you’re heading into retirement and are short of money, you should move your investing in the opposite direction: aim for safer investments, rather than taking one last gamble. As well, here are three other examples of really bad retirement investing strategies:
First retirement Investment strategy to avoid: Stock options
Stock options are not a smart idea if you’re headed into retirement. Stock options are expensive to trade. You pay commissions each time you buy or sell stock options. Commissions eat up a large part of any profits you may make with stock options, particularly if you trade in small quantities. What’s more, every trade costs you money in “slippage,” or the difference between the bid and the ask price. With options, this difference is larger than it is with stocks.
Stock options can also be rendered worthless. Unlike common stocks, an option has a limited lifespan. You can hold common stocks indefinitely in the hope that their value will increase. A stock holder can wait out a temporary downturn in the hope of eventually realizing a profit. But every option has an expiration date.
If an option is not sold or exercised prior to its expiration date, it expires and is worthless. For this reason, an option is considered a “wasting asset.” Part of the price you pay for an option is for “time.” With each day that passes, you lose more and more of this “time” premium.
To profit in stock option investing, you have to be right in three different ways: price direction, price-change magnitude and time—and that’s virtually impossible to do consistently.
Second retirement investment strategy to avoid: Junior mining stocks
This second retirement investment strategy to avoid is really about probability. When junior miners start their exploration process they have high hopes that they’ll find an “anomaly.” An anomaly is a geological formation or find that might attract a prospector’s interest. However, one rule of thumb for mining stocks is that you have to look at 1,000 “anomalies” to find one “prospect,” and that fewer than one “prospect” in a thousand turns into a mine. In other words, finding a mineable deposit is a million-to-one shot.
That’s one reason why junior mining stocks are highly speculative, and are apt to cost you money. Another reason why junior mines are risky is that it’s relatively cheap and easy to launch an exploration program and sell stock to the public. So the junior mine’s promotion business attracts more than its share of unscrupulous operators and stock promoters. Putting your savings into the type of business that has a million to one chance of striking it rich is not a retirement investment strategy, it’s gambling.
Third retirement investment strategy to avoid: Penny stocks
Penny stocks are cheap and that’s why many novice investors think they make great investments when they don’t have a lot of money. Here’s some insight: it’s much easier to launch a seductive penny stock promotion than it is to create a successful, lasting business. Most penny stocks are over-hyped. Penny stocks tend to be speculative, and are engaged in such things as finding mineral deposits that can be mined at a profit, commercializing an unproven technology or launching new software. They are unproven companies that have very little chance of becoming a sustainable business. You’ll also have to be on the watch for unscrupulous stock promoters who will over-inflate earnings and talk up a stock for their own best interests. If you’re headed to retirement, stay away from penny stocks.
In fact, as we mentioned earlier, if you’re heading into retirement and are short of money, you should move your investing in the opposite direction: well-established companies that have proven business models. They’re a far better option than taking one last gamble.
If previous retirement investment strategies have left you with low investment funds, you have two practical solutions to a pre-retirement money shortage. The funny thing is that either one can improve your quality of life in retirement, in addition to your finances.
The first solution is to work longer. Put off retiring from your current position, or continue to work part-time. Or, find full- or part-time work in another field. To start, this can solve a common problem that many retirees fail to foresee: how hard it can be, and how much it can cost, to fill up all the free time that comes with retirement.
The second solution is to do a detailed study of how you spend your money now. Then, you analyze your findings to see what personal expenses you can cut or eliminate. This too can have fringe benefits, especially if it helps you break unhealthy habits. You may be surprised at how much you’re spending and how much more you could be saving for retirement.
Stock brokers will always invent new retirement investment strategies. They usually benefit the broker more than your savings. Have you used a unique retirement investment strategy? Share your experiences with us in the comments that follow the original version of this blog at TSINetwork.ca.
Pat McKeough has been one of Canada’s most respected investment advisors for over three decades. He is the founder and senior editor of TSI Network and the founder of Successful Investor Wealth Management. He is also the author of several acclaimed investment books.