Just Say No to Financial Procrastination

 

In the past, I have highlighted some serious risks to investing success from topics as timeless and simple as avoiding unreasonable portfolio costs to more timely market risks like warning signs of future inflation. Today, I want to share some quick thoughts on a risk that most individual investors wrestle with everyday – financial procrastination. Similar to the “this is my last tasty (but unhealthy) meal…I’m starting tomorrow” diet, financial procrastination is when individuals put off all of the important things they need to do to be a successful investor. It’s when tomorrow turns to next week and then next week turns to next month. The next thing you know, it’s been a year since you meant to rebalance your portfolio or sell that individual security.

Take for example the so-called “orphan 401K” – it’s when an individual leaves a job and the retirement assets that they accumulated in their past employer’s 401K plan sits idly, unmanaged and neglected. Most people plan to roll these assets over to either an individual IRA or to their new employer’s 401K plan, but inevitably life gets in the way. It’s not just 401Ks either. Many individuals have opened up various investment accounts along the way and most sit unattended with no real plan in mind. Fortunately, it’s easy to fix these issues. All it takes is a little will power.

Continuing our example above, let’s assume someone sits down and rolls one or even all of their old 401Ks into an IRA. What are the benefits?

  • Unified Plan – When accounts are scattered all over the place, it is difficult to tell exactly what the ultimate goal is. Once investors consolidate all of their separate accounts in a single location, most are surprised to realize that they may have inadvertently taken too much risk or (almost just as bad when saving for retirement) too little risk. Taking the time to piece together the big picture is the only way to truly evaluate (a) where you are right now, but also (b) where you are headed.
  • Open Architecture (A.K.A. Better Investment Choices) – In 401K plans, investors are given a limited number of options. In theory, this is to help plan participants pick a few good funds. Put simply, it prevents “paralysis by analysis.” Give someone too many options and they will be overwhelmed. Using a preselected fund menu might prevent beginners from straying too far, but often times it also prevents astute investors from selecting what they believe to be the best option for their portfolios. In most cases, an IRA provides open access to a larger, more varied selection of investment options.
  • Lower Fees – 401K plans have administrative fees and those cut into investment returns over time. Rolling those assets into an IRA may allow you to avoid such costs and improve performance.
  • Professional Management – I might be a little biased when I say this (okay, I am definitely biased when I say this), but rolling over a 401K into an IRA opens up the option for professional discretionary investment management, which makes a lot of sense for certain people. For those unfamiliar with all the nuances of portfolio management, such an option might help more in investing intelligently than anything a preselected menu of funds might offer.

This is just one example and clearly there are potential benefits to be had. While some of these things may seem small, they can lead to huge improvements over time. Ultimately, while it’s important to consider all the factors at play before making any type of financial decision, I think the lesson here is to just not put it off. Consider all the factors, make a decision, and then execute.

Retirement may seem far away so it’s easy to push things off for things that seem more timely, but it’s more important than you realize. So consider this your call to action – take one or two of those things you’ve been meaning to do and push it to the top of your list today. Trust me, it’ll be worth it.

Until Next Time,

Chris Hugar, CFA

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