3 Retirement Mistakes That Are Killing Your Portfolio

What can stocks like Enbridge Inc (TSX:ENB)(NYSE:ENB) teach us about retirement investing? Discover the top three mistakes that are holding your retirement portfolio back.

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The number one retirement mistake is easy. At the end of the day, most investors simply don’t save enough. While so much emphasis is placed on where to invest, the most important factor is that you have capital to invest with in the first place. The biggest secret is to automate your savings.

If you’ve already stashed money away, the next step is to invest it wisely. Unfortunately, most people saving for retirement make the same mistakes over and over. Over time, this can significantly reduce the value of your portfolio. Investing is always a balancing act, and most retirement portfolios fail at this game. If you want to make the most of your retirement account, keep these three lessons in mind.

Go for gold

One of the biggest mistakes that retirement investors make is to avoid taking risks. If you’re young and saving for the future, there’s no reason to avoid risk as long as it comes with a commensurate reward. Over the decades, for example, small-cap stocks have shown more volatility than large-cap stocks. Still, over the long term, small-cap stocks outperform their larger peers. The extra risk is worth it if you have a long enough time horizon.

Even if you’re currently retired, odds are that your portfolio could use a bit more risk. If you’re 60 or 70 years old, for example, you may need to rely on your retirement savings for another 20 or 30 years. That’s plenty of time for the extra risk to pay off with additional earnings.

Green Organic Dutchman Holdings Ltd (TSX:TGOD) is a perfect example of a high-risk stock that offers tremendous upside. The company is worth just $550 million, but if shares traded in-line with industry multiples, there could be 100% upside or more. Don’t bet the farm on these stocks, but most retirement portfolios should have exposure to their explosive potential.

Patience is key

Don’t forget to stay patient with your bets. Fairfax Financial Holdings Ltd (TSX:FFH) is a textbook example. Since 1985, the stock has generated annual returns of more than 17%. That’s an incredible track record. Yet despite the impressive long-term performance, there have been long stretches of underperformance.

For example, from 2003 to 2006, Fairfax stock earned roughly 0%. Yet from 2007 through 2009, in the middle of the financial crisis, Fairfax stock grew by 40%! In the end, those that trusted the company ended up as big winners, but it took guts and patience to withstand the lean years. Don’t give up on long-term winners simply because a few specific years don’t pan out.

Trusting dividends

Dividend stocks are a popular choice for retirement investors. They offer regular cash payments that can be used to purchase more shares or create a passive income stream. But not all dividend stocks are created equal. All too often, investors blindly trust a company’s high dividend without researching its durability.

Consider Canadian bank stocks. These dividends are often lauded for their stability, but because banks are essentially leveraged bets on the economy, the payouts could be in trouble if another bear market hits. Enbridge Inc (TSX:ENB)(NYSE:ENB), meanwhile, should be able to service its 6.5% dividend regardless of what happens with the global economy.

Throughout the 2008 bear market, Enbridge never ceased to pay its dividend. In 2014, when oil prices were cut in half, the company actually boosted the payout, and shares rose throughout the rout. That’s because Enbridge is a monopoly-like business, owning critical pipeline infrastructure that oil and gas producers use no matter what prevailing commodity prices are. When shopping for dividends, look for business models like Enbridge.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

The Motley Fool owns shares of Enbridge. Fairfax Financial Holdings is a recommendation of Stock Advisor. Fool contributor Ryan Vanzo has no position in any stocks mentioned.

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