signs of underinvesting

Figuring out how much to invest is difficult. Often, it involves a lot of research with a healthy dose of assumption. After all, no one can actually predict what the market will do with complete accuracy; they can only create estimates based on historical data, performance expectations, and other points. Since determining what’s an appropriate amount to invest is challenging, many people end up missing the mark. If you’re worried that you aren’t committing enough money to your investments, here are five signs of underinvesting that you need to know about.

1. Your Only Investments Are in One Retirement Account

While setting money aside in a 401(k) or IRA is an excellent idea, if those are your only investments, there’s a solid sign of underinvesting. Often, that one account alone isn’t going to be enough to reach your goals.

In most cases, it’s best to supplement your main retirement account with other investment accounts. This could include voluntary options through your employer, non-retirement brokerage accounts, or other similar options.

2. Your Retirement Account Is Maxed, and Your Savings Account is Overflowing

Once you max out your retirement account and have a healthy emergency fund, continuing to put your money into a savings account means you’re missing out on an opportunity. Most savings accounts offer minimal returns, even if it’s a high-yield savings account. As a result, the money you’re setting aside may not be keeping pace with inflation.

Now, it is smart to have money available in a highly accessible savings account for emergencies. But once you’ve got that money gathered, it’s time to transition to an approach that will bring you higher yields.

A brokerage account could be an excellent option. Not only will you capture more growth potential, but you can withdrawal the money without the penalties that come with many retirement accounts. That could make it suitable for a range of mid- to long-term savings goals.

3. Your Portfolio is Low-Risk

While it’s wise to shift your portfolio into more conservative territory as you get closer to retirement, being low-risk long-term might not be ideal. If you’re highly risk-averse and have been incredibly cautious with your investments, you may not be seizing the same amount of growth potential as the average investor. As a result, you may fall short of your savings goals.

If you’re going to remain low-risk, then you need to invest more money. That way, you can compensate for lower returns with a more aggressive savings rate.

4. You Have Lofty Goals

For most people, their investment goals fall into “modest” territory. For example, they may want a comfortable – but not necessarily luxurious – retirement. If that’s the case, while they might need to save quite a bit, they don’t have to be overly aggressive.

However, if your goals are far loftier than average and you’ve been following standard investment advice, there’s a decent chance you’re underinvesting. Most recommendations regarding salary percentages to set aside are based on achieving average targets, not grand goals. So, if yours fall more into the latter category, you might need to set more aside to make your dream a reality.

5. You Haven’t Increased Your Investing After a Major Life Event

When it comes to investing, many people use a set-it-and-forget-it approach. While this can be fine if your personal circumstances remain stable, it isn’t ideal if things change.

For example, securing a raise, getting married, and having a child are all life events that could make increasing your investing rate a smart move, if not an outright necessity. Consider how the life event has altered your life and if having more money set aside would be beneficial. If the answer is “yes,” make the adjustment right away.

Are there any other signs of underinvesting that people should watch out for as they plan their investments? Share your thoughts in the comments below.

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