3 reasons your retirement investments are lagging behind the stock market

the S&P 500 has shown incredible growth over the past two years – nearly 30% in 2019, followed by around 14% in 2020. To put that in perspective, if you applied those growth rates to a $ 100,000 balance, it would grow to almost $ 150,000 in two years. And that’s without considering your ongoing contributions. This type of growth can give you a big boost in reaching your retirement savings goals.

If you don’t see these high growth rates in your retirement account, now is the time to find out why. Here are three common reasons why your retirement investments may be lagging behind the stock market.

1. You are too conservative

Your portfolio could be underperforming because your mix of investments in stocks, bonds and cash is too conservative. Your age is a big factor here, because what’s too conservative at 25 might be right at 55.

There is, however, a simple formula for checking your allowance. Just subtract your age from 110 – the answer is the percentage of stocks you should have in your portfolio. If you’re 25, for example, it’s appropriate to own 85% stocks and the rest in bonds and cash. At 55, you would have 55% stocks and 55% bonds and cash.

The beauty of this formula is that it naturally leads you to a lower percentage of stock stocks over time. This allows you to participate in market-level growth when you are younger and then switch to a more conservative asset mix as you age.

As your portfolio becomes more conservative, you will see lower growth rates. Think of this as an intentional underperformance of the market. It protects you from volatility, which is more difficult to manage when you take retirement distributions or are about to start taking them.

2. You pay high fees

The administrative fees you pay to mutual funds and your 401 (k) put negative pressure on your returns. If your investments are earning a 7% return, but you pay a 2% fee, your actual return is 5%.

Look up the expense ratios for your mutual funds and ask your 401 (k) administrator for a breakdown of your plan’s expenses. Mutual fund expense ratios typically range from less than 0.1% to 2.5%. You want to stay below 1% or even 0.5%, if possible. A 401 (k) administrative fee of 1% is pretty normal, but 2% or more would be high.

If your 401 (k) charges 2% per year and only offers funds with spend ratios of 1% or more, you have decisions to make. You could start investing your money elsewhere, but that doesn’t always make sense. You get tax-deferred profit growth in your 401 (k), which is a powerful thing. You may also receive matching contributions from the employer. These two features combined can be worth more than what you are wasting in costs.

To get the best of both worlds, you can contribute enough to 401 (k) to maximize your employer match, then send additional contributions to a Traditional or Roth IRA if you qualify. You can’t get a tax deduction for IRA contributions like you do in 401 (k), but IRAs offer tax-deferred growth.

3. You are trying to time the market

Even when you have the right mix of assets, trying to time the market can lower your returns. What often happens is that you sell your retirement investments when the stock price goes down – in an attempt to cap your losses. But you won’t buy back until the stock price goes up, so you are sure a recovery is underway. These are normal human reactions, but the result is that you have sold cheaper and bought more. And that’s not the way to maximize your returns.

A better approach is to stay in the market through the good times and the bad. This ensures that you will experience recovery gains, which can be large and unexpected. More importantly, these great days of growth are also great drivers of long-term returns. A 2019 report from JP Morgan found that missing 10 of the best market days between 2000 and 2019 would reduce your annual returns by 6.06% to 2.44%.

Take-out meals? Stay in the market. It is too risky to do otherwise.

Returns make the difference

If you can change your retirement portfolio or the way you manage it to improve your returns, do it. Even a small change will help. On a balance of $ 100,000, for example, you will earn $ 35,000 more in 10 years with growth of 7% versus 5%. Increasing your holdings of stocks, swapping an expensive mutual fund for a cheaper option, or learning to put blinders on when the market goes wrong are all strategies that can help you reach your retirement goals much faster.