Key takeaways

  1. It’s easy to make decisions in a vacuum, miss opportunities, make costly mistakes, and come up short on retirement savings without a synchronized plan in place
  2. With a plan for nothing, you’ll invest in anything and expose yourself to unnecessary risks which will put your future in jeopardy
  3. It’s not how much you make, it’s how much you keep – high fees and taxes will substantially reduce your wealth
  4. You will chase returns and make very costly mistakes that can put your future plans, and your retirement, at risk without a plan
  5. Financial planning is essential to an investment strategy that evolves to support your life and what matters most to you

“The best way to measure your investing success is not by whether you’re beating the market but by whether you’ve put in place a financial plan and a behavioral discipline that are likely to get you where you want to go.” - Benjamin Graham

How should we define successful investing? Is it getting the best return? Finding the next big company or investment idea? Avoiding recessions and downturns? Or is it about achieving a desired outcome?

Investment returns matter, but they are far less important than having an evolving financial plan that helps you see your bigger picture, identify and prioritize your goals, and align your money, including your investments, to what matters most to you. Your life is dynamic and ever-changing, and your investing strategy needs to work in concert with it.

Failing to plan is planning to fail. Here are the biggest mistakes you will make if you try to invest without a plan.

You will invest without direction and never reach your destination

How much money do you need to retire and how much do you need to save each year to get there? Is saving 10% enough or do you need to save 15% or even 20% of your income? And how will you balance investing for retirement with saving for other goals and everyday life?

Investing for your future cannot be done in a vacuum. It requires a plan for how much to save, how to invest those savings, how much risk to take, and how to minimize fees and taxes. And it requires a strategy that can evolve as your life, your career, and the world around you change. Without a plan, you’ll never know when you achieve success.

An ongoing plan helps you see your entire financial picture and all of the options that exist, understand your trade-offs, and make the best decisions that support the life you want. As you navigate life – marriage, family, career, cars and homes, college, and retirement – you’ll do so with greater clarity and confidence.

You will own the wrong things with too much risk

The world of investment options is almost endless – U.S. and international stocks and bonds, real estate, gold, commodities, stock options, cryptocurrencies, and the list goes on and on. But what are the right things to own and how much risk should you take? And how should that level of risk change as you get closer to retirement?

Without a plan, you won’t have a guide to help you decide what to invest in, where to invest – like a 401(k) or a Roth IRA or a taxable investment account – or how to manage risk. And the right level of risk should be personalized to your situation. It’s knowing how much risk you can tolerate, how much risk you need to achieve an appropriate return, and how much risk your plan can support today and along your path to retirement.

Investing without an overarching strategy will expose you to a lot of unnecessary risks, and that means you could risk everything.

You will lose a lot of money to fees and taxes

Where you invest your money can be as challenging as deciding how much to invest. Do you invest in individual stocks and bonds, exchange-traded funds (ETFs), mutual funds, real estate investment trusts (REITs), annuities, hedge funds, or private equity? Each investment comes with a different fee structure and tax implications. Making the wrong decision can cost you a lot of money.

High fee products that come with the promise of high returns can not only lead to poor returns but it can mean less of your money is growing for you over time. And given that 80% to 90% or more of actively managed investments underperform their benchmarks, you are paying more and losing out on very valuable growth over time.

And when it comes to taxes, it’s not just about paying less today. As you progress in your career – promotions, raises, new jobs, stock compensation, starting a business – you need a strategy that can adapt and help you make more informed decisions about where to invest your money and how to minimize taxes as your situation changes. Without a plan, you’ll miss critical opportunities that could help you keep more of what you make.

You will chase returns instead of following a plan

Trying to time the markets or predict the direction of the economy, interest rates, or inflation all sound like reasonable strategies to pursue. Who wouldn’t want to avoid losses and capitalize on big investment gains? The problem is that these strategies don’t work consistently and repeatedly over time to your advantage.

The annual DALBAR Investor Behavior Study found that the average investor* trailed the S&P 500 index over every time period from twelve months to thirty years.

Summary of Returns for the Period Ending 12/31/2020**

Average Equity Fund Investor Return (%) S&P 500 Return (%)
30 Year 6.24 10.70
20 Year 5.96 7.47
10 Year 10.23 13.88
5 Year 12.31 15.22
12 Month 17.09 18.40

Missing returns in any one year can be bad enough. Missing out on the benefits of compounding investment growth over decades can be devastating.

The average investor isn’t following a plan, they are chasing returns. Following a plan, and one that evolves over time, can help you invest wisely, remain disciplined in your strategy, and help you avoid very costly mistakes.

Financial planning is essential to achieving better investment outcomes

A financial plan, one that dynamically evolves as your life changes, is essential to avoiding costly investment mistakes and to achieving your best investment outcomes. Your results should never be measured against anyone else’s. They should be measured against their ability to support you and the life you want to live.

Money, and how you invest it, can be a very powerful tool to help you live well. With an ongoing financial plan, you’ll make smarter, more informed decisions, navigate life with greater clarity and confidence, and put yourself on the right path to making your dreams a reality.

Learn how a personalized financial plan can help you avoid very costly investment mistakes that could put your retirement at risk.

*Average Investor as determined by Dalbar.

** Source: "Quantitative Analysis of Investor Behavior (QAIB), 2021," DALBAR, Inc.