Six Financial Blunders and Their Fixes

BOSTON ( TheStreet) -- This year will likely be remembered for its broad, unpredictable market swings.

As one might expect in a time of volatility, making all the right moves with your investment portfolio and retirement plan was a challenge. What didn't help matters were the mistakes and overreactions many investors made, moves that could hurt them both immediately and for years to come.

But there are also some easy steps to take to recover from the mistakes of 2010 for a better 2011:

PROBLEM 1: Analysis paralysis
When confronted with questions about what direction to go in with their financial plan, many decided to go... nowhere.

Mark Byelich, president of M.J. Byelich & Associates, a Pennsylvania-based financial services firm, says the problem is not just lacking the confidence to stick with an investment strategy, but even having a well-considered plan to start with.

"I talk to so many folks who say they held back from making any contributions to their 401(k) because they were unsure what to do with the market," he says. "There is this stagnation. Everyone is just sort of stuck in the mud, uncertain of what to do."

"You can dissect it down to, 'Maybe I didn't get out of bonds a month ago' or, 'I sold my commodity allocation because I thought we were at the top,' or 'I didn't buy gold,'" he adds. "But I think it comes down to a more fundamental thing: 'I didn't really have a real asset allocation plan, I didn't have a real financial plan and therefore I don't have the confidence to stay in the game.'"

THE FIX: Don't be a baby. Analysts uniformly see inaction as the most common problem, but also the easiest to fix: Get professional advice, use it and get your assets working. Not doing anything isn't going to help.

PROBLEM 2: Losing the match game
An increasing number of employees are not taking full advantage of the matching contribution their employer will make to their 401(k) plan. A study by human resources consulting firm Hewitt Associates ( HEW) found that about 28% of participants don't contribute enough to their 401(k)s to get the maximum amount of matching funds from their employers.

"That's free money take advantage of it," Byelich says. "Some very, very smart people I've talked to have told me they stopped the contributions to their 401(k). It is amazing."

Mike Steranka, CEO of Retirement Planning Services, a Maryland-based financial planning firm, recalls a conversation in which an employee was passing up the opportunity to collect on a 100% match, up to 9% of pay, offered by his company.

"I told the guy, 'If we put in $9,000 and they give us $9,000, that's a 100% return," he says. "If I could offer a 100% return, there would be a line outside around my window."

THE FIX: Contribute as much as you can to take full advantage of an employer match. Keep in mind that the tax-advantaged status of retirement plans, and dollar cost averaging, means that what you contribute is less a hit on your bottom line than the total may indicate. A $1,000 contribution, for instance, may only cost you in the ballpark of $850.

PROBLEM 3: Taking on the full Roth tax hit
Even though a Roth IRA conversion entails paying taxes upfront, a one-time offer was put on the table to split that burden over next year and 2012.

But, fearing that the expiration of the so-called Bush tax cuts would lead to higher rates starting next year, many paid the balance in full this year. Now that it appears some, if not all, of the cuts will be extended, tackling the full bill may prove to have been unnecessary, more of an immediate hit and that much less to collect interest on your behalf.

THE FIX: It is never too late to consider a Roth IRA conversion. Even if the ability to spread the tax hit was a one-time offer, paying that charge upfront in a lump sum can still make good financial sense for many. Tax rates will likely rise, and younger investors will be positioned to earn more in the coming years and therefore be in a higher bracket. This likely means that what you take on in taxes now will be less than the hit you may face later. The relatively new introduction of Roth 401(k)s may be a good option to investigate, especially for younger workers.

PROBLEM 4: Losing interest
With interest rates lingering at phenomenal lows, refinancing long-term debt would seem a no-brainer. But people are still holding off.

"You are looking at 3.5% to 4.5% on a 30-year fixed," says Steranka, also an investment adviser rep for Investment Advisors and a registered rep with Broker Dealer Financial Services. "Those are such low rates that people should take advantage of them. Where are they going to go -- zero?"

"While I don't see rates increasing over the near-term horizon, there is probably not going to come a time where they are going to get much, if any, lower," says Morrison Creech, head of private banking and executive vice president for Wells Fargo Private bank ( WFC). "As rates start moving up, they will do so pretty fast. There will be some signs of economic growth then, all of a sudden, monetary policy will change and they will start tightening and it will move pretty rapidly. There is no upside in waiting, but there is a lot of downside."

THE FIX: Don't be afraid of debt. By taking advantage of low interest rates on longer-term loans such as a 30-year mortgage, you have the opportunity to invest that money and, even after accounting for interest, may still make a profit on even relatively low-risk returns.

PROBLEM 5: Not assessing assets
Financial advisers recommend rebalancing your portfolio at least once a year, preferably every quarter.

Continuing a habit acquired during the recession, though, people still seem to toss their statements aside. If they are looking at their performance, many may not be making the adjustments they should.

"It is like the old Will Rogers quote, 'I'm not concerned about the return on my money, just the return of it,'" Steranka says. "Whenever we have corrections, people just don't want to open their statements. Some people, unfortunately, are not that sophisticated, or they just aren't concerned, or they just don't know what to do."

Part of the blame may go to the rise of target date funds, automatic enrollments and automatic deferrals. This year saw a big push in the "set it and forget it" approach to retirement plans and, as an unintended consequence, many are lulled into a false sense of security.

The poor performance of numerous target date funds during the recession bears out a bit of always good advice -- take ownership of your financial plan, adjust as needed and don't neglect seeking professional guidance when you need it.

THE FIX: Don't let your asset allocation sit idle. Try to evaluate your holdings, and rebalance, on a quarterly basis. Keep in mind that target date funds may be convenient, but they need to be monitored for performance just as any other holding would be.

PROBLEM 6: Dialing down risk
People are seemingly so afraid of losing money that they are, in fact, losing money.

Dialing down risk in times of volatility, especially when it comes to retirement savings, may seem to make sense. With many fleeing stocks and bonds for the perceived safety of cash investments, however, the loss of adequate returns may linger for years to come.

A recent study by MetLife ( MET) found that a fear of unexpected expenses, and the related desire for greater liquidity, was leading even more-affluent Americans to rely heavily on low-yield savings accounts, CDs and money market funds as they save for retirement, despite their dissatisfaction with returns.

A Merrill Lynch ( BAC) survey earlier this year of those with $250,000 or more in investable assets found that a greater percentage of people age 18 to 34 describes their risk tolerance as low (52%) even though that demographic is in most need of the portfolio-building returns that can come with even moderate risk.

"When they are earning half a percent in a money market account, they may think of it as being safe, but they are negative," Steranka says. "They are negative compared to inflation. What I've found, to help drive people out of that mud, is to show them the effect of their investment five, 10, 15 and 20 years out. We can look at it a number of different ways and it just always makes sense to move forward."

"There are difficult markets, no doubt about it, and there is lots of uncertainty," Byelich says. "But isn't that how it is every year, really?"

THE FIX: Take some risk! It's the only way to boost returns. Sticking with a safe 1% or 2% return only increases the likelihood of running out of money -- for anyone. Older investors concerned about taking on too much risk should also consider an annuity, especially one with an "income benefit rider" that guarantees a set income. Just make sure to evaluate the product you are considering carefully and stick with a reputable provider, such as a major insurance company.

-- Written by Joe Mont in Boston.

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