Gil’s Musings

Don’t Let Fear Guide Rollover Decisions

For many investors, the two biggest enemies are their own fear and insecurity. Even those who have developed a solid strategy to build healthy retirement savings may find themselves questioning whether they could be getting bigger returns. It’s human nature that we focus on what we might be missing versus what we already have..

The problem is that fear and insecurity can lead to disastrous investment decisions. They can cause you to buy or sell investments you shouldn’t as you chase returns that in most cases will never materialize.

There are some out there who prey on these proclivities. I recently saw a news release from the Texas State Securities Board warning about sales pitches urging state employees to roll their pension funds into questionable investments. Pensions, like company-sponsored 401k plans, have no business in such investments because they risk leaving savers short for retirement.

What many don’t realize is that most retirement plans offer some of the lowest-cost investing available. Over time, the savings from those low costs are compounded, adding up to much bigger gains with far less risk, even if they aren’t immediately apparent in monthly statements.

That’s why it’s important to have confidence in your investment strategy. Absolutely, it’s important to reassess that strategy periodically. But the promise of higher returns elsewhere shouldn’t cause you to alter course..

You should be especially wary of sales pitches that require you to roll over some or all of your retirement plan into other investments. They may promise a higher return, at least in the short term, but the cost of making the switch will probably erode any benefits.

Replacing those investments, as with any other decision to sell a security, means you’ll need higher returns to cover the costs and taxes associated with the sale.

While it’s possible to do better on your own, it’s unlikely. Even in the best of cases, investors are hard-pressed to top the returns of their retirement plans by investing on their own. A 2012 study by the Teacher Retirement System of Texas found that two-thirds of its members would receive less than 60% of their pension benefits if they withdrew money from the fund an invested it on their own.

It’s important to remember that investment advisors are just that: advisors. They aren’t selling you insurance. There are no guarantees in investing. Often, “venturing out” from your retirement plan not only increases your costs, but it also increases your risk. That’s because the advisor who enticed you to leave your plan must take on additional risk to recoup the fees it will cost you for making the switch. Most investors aren’t prepared for the surprise of losing 30% to 40% of their investment, especially when they thought they were getting a higher return.

Consider what happened in 2009, which we now know was the bottom of the market. It provided a tremendous opportunity, but even the best managers lost big sums of money. It couldn’t be avoided. Those who seized the opportunity had to endure the losses in order to benefit. In other words, the investors who were unwavering in their strategy, who weren’t swayed by the market plunge and distracted by promises of better returns were the ones who ultimately benefited.

Don’t allow your fear and insecurity to override sound investment decisions. Retirement plans are designed to weather short-term market volatility, and beating the market this year isn’t nearly as important as building wealth over the long term and ensuring that you have adequate savings when you stop working.

Before you rollover your retirement account into something that promises a bigger reward, remember something else: if it sounds too good to be true, it probably is. As another old saying goes: Figures don’t lie, but liars do figure.

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