4 Ways To Be A Smarter Investor
Given how stock prices have surged the past five years, you didn’t exactly have to be a financial whiz kid to earn big gains. But this generous market won’t last forever. Sooner or later, it will give way to a stingier version that will not only giveth but taketh, a market that won’t be so forgiving about mistakes. Here are four tips that can help you prepare so you’ll be ready when the market gets tough.
1. Don’t be a “bull market genius.” Pretty much anywhere you put your money in recent years you reaped impressive returns. All nine of Morningstar’s U.S. equity style categories returned an annualized 14% or more the past five years. That’s good. It’s helped investors fatten up retirement accounts that took a big hit back in the financial crisis.
But long sustained rallies in stock prices can be dangerous. Investors can get the impression that it’s their investing prowess, their ability to sort through the array of investments available and pick out the winners, that’s responsible for the gains they’re racking up. Investing wags have a name for such people: “bull market geniuses.”
In fact, if you look more closely, you’ll see that even professional investors are really doing little more than riding a rising market. The latest SPIVA Scorecard from S&P Dow Jones Indices shows that more than 70% of U.S. stock fund managers underperformed their benchmark index over the past five years.
The lesson for individual investors: don’t ever fall for the illusion that you’re in control when it comes to the markets. Although we’re not totally at the market’s mercy—we can decide how much to put in stocks vs. bonds and how we react when the market sizzles or fizzles—we largely must settle for the returns the markets deliver. Lose sight of that fact, and you may pay dearly.
2. Avoid the smorgasbord syndrome. If you’ve been to one of those all-you-can-eat buffets, you’ve seen how high people can pile their plates with all manner of entrees, salads, appetizers and desserts. Many people invest the same way. They load up their portfolio with every new fund, ETF or other investment that comes along. But that approach no more creates a well-balanced portfolio than choosing one of every item from a smorgasbord gives you a balanced diet. When it comes to investing your retirement savings—or investing any money—simpler is better. The more you keep adding investments to your portfolio in the name of diversification, the more likely you’re di-worse-ifying than diversifying. Keep it simple.
3. Focus on fees, not returns. Ever been to a party where someone held court about how they doubled their money in some hot IPO or other investment? How many times have you been to a gathering where someone bragged that they’re paying less than 0.20% for a total stock market index fund? Probably never. Start a conversation like that and you’ll find people quickly making for the crudite.
But even though expenses may not be the sexiest investment topic, I’d argue they’re one of the most important. And the more control you exercise over how much you pay for investments, the larger the nest egg you’re likely to end up with in retirement. Although it’s possible for some investment managers to post returns high enough to offset outsize fees, those who do so consistently are rare—and hard to identify in advance. A better course: stick to low-cost index funds. You’ll get to keep more of whatever returns the markets are delivering and, as I’ve shown before, potentially increase your retirement income by 40%. See how that fact goes over at the next cocktail party.
4. Ignore the circus. Everybody loves it when the circus comes to town. The trapeze artists, the lion tamers,the clowns, the elephants…the whole atmosphere makes for a good time. There’s an investing circus too—carnival barker pundits touting their stock picks, the investment strategists looking into their crystal balls to foretell the market’s future, analysts walking the tightrope of making bold calls and hedging them at the same time—and it’s in town every day.
If you simply enjoy the Fellini-like spectacle, fine. Watch and enjoy. But don’t let the hype and the hoopla distract you from your investing strategy. The investment circus crowd is always jabbering away about something—the Alibaba IPO one day, the possibility of a market meltdown the next, etc.—but it’s more sound and fury than insight, or at least insight you should act on. Once you’ve built a mix of low-cost stock and bond index funds that jibes with your goals and tolerance for risk, stick to it, periodically rebalance your portfolio to bring it back to its original proportions—and ignore the financial equivalent of tumblers, contortionists, daredevils and other performers looking to draw you into their tent. (9/22/14)
Walter Updegrave is the editor of RealDealRetirement.com. If you have a question on retirement or investing that you would like Walter to answer online, send it to him at email@example.com.