1/24/2014 1:00 AM ET|
This 'shocking' strategy will save your portfolio
Too many investors buy into sexy gimmicks when simple diversification remains the best way to get the most out of your investments.
After a stellar year for the S&P 500 ($INX) in 2013, many investors are debating whether stocks will put up a repeat performance or if this is the year the market crashes.
Both camps are dead wrong.
There is one shocking strategy that can save your portfolio in 2014. There is one exclusive secret that even the best minds on Wall Street don't want you to know. There is one money-minting technique used by hedge funds to generate amazing returns.
It's called . . . "diversification."
Ok, stop rolling your eyes. Maybe a diversified, buy-and-hold strategy doesn't seem sexy . . . but believe me, it's effective. This investing style doesn't lend itself to splashy marketing and clicktastic headlines. But you may be surprised to learn how much a diversified portfolio has returned over the long-term.
Here are the facts: A diverse portfolio delivers pretty compelling long-term returns. According to J.P. Morgan Asset Management , the 10-year return of a balanced portfolio was 7.2 percent annually through the end of 2013.
This fact is a bit shocking to some, especially those who think that diversification is dead in an age of extreme asset correlations and low interest rates. But here's the thing: Assets don't remain correlated forever. And over the long term, bonds and even cash provide important hedges against stock market declines.
Yes, between May 2009 to May 2011, everything seemed to move in lockstep. Gold rose almost 70 percent while the major U.S. indexes went up a little under 60 percent, not counting dividends, and the iShares MSCI Emerging Markets Index Fund (EFA) added just short of 80 percent. That's a pretty tight range.
Except in 2013, things diverged dramatically. Gold and emerging markets stepped off a cliff, while U.S. equity markets soared.
If you were heavily into precious metals or Latin America in 2013, you learned a painful lesson in the importance of diversification.
Allow me to state the obvious: What's hot now will not be hot in the future. A diversified portfolio ensures you don't have to guess accurately and move your money to be safe.
Long term, asset manager Vanguard estimates a portfolio of roughly 60 percent stocks and 40 percent bonds would have returned an average of 7.8 percent annually across the last 90 years or so -- with 16 of 87 years, or 18 percent, posting negative annual returns.
That's not mind-blowing on its face, sure. But a nearly 8 percent return and an 82 percent win rate sounds pretty darn nice to most investors I know.
Consider that's a rate of return that will double your nest egg every 10 years. It's a rate of return that will allow a 25-year-old to retire at 65 with $1 million in savings simply by investing a modest $3,750 annually or roughly $315 per month.
And best of all, it's a rate of return that is imminently achievable without taking risky bets or paying out the nose in management fees.
Never No. 1 . . . but never last place
Many investors have started to write off diversification as a boring strategy that promises underperformance.
Others have simply given up on interest-bearing assets because of the low interest rate environment and the seemingly endless rally for stocks. In fact, the American Association of Individual Investors recently reported that as of December, stock allocations rose to a 6.5-year high to 68.3 percent of portfolio allocations on average. Bonds and bond funds fell to their lowest levels since early 2009 at just 15.2 percent.
It's understandable why some chose to get overweight in stocks. But while a balanced portfolio with some rather meager bond investments didn't make you the No. 1 investor on the block in 2013, such a strategy will most likely protect your capital if and when this "risk-on" market changes gears.
And for many Americans more concerned with retirement security than retirement luxury, that's an important distinction.
Besides, even if you are unabashedly greedy or simply want to retire rich, don't fall into the trap of thinking that by not diversifying you are ensured bigger profits.
Consider that from the start of 2011 to the end of 2013, the three-year return of S&P 500 index funds is about 15 percent annually, compared to 13.4 percent for active managers of the typical large-cap blend fund. And that's just average; some in the lowest tiers actually lost money despite the bull market.
And don't forget those disappointing numbers from 2012, where 63 percent of blue-chip funds, 80 percent of mid-cap stock funds, and 67 percent of small-cap stock funds underperformed their benchmarks. The final 2013 tallies aren't in yet, but you can bet on another year of underperformance for most active managers.
With so many high-fliers in the last several months, it's tempting to scoff at this conservative investing style. After all, if you pick just one Intercept Pharmaceuticals (ICPT), which is up a staggering 380 percent since just Jan. 1, you can easily gloss over a few boneheaded mistakes.
In theory and in hindsight, at least. But let's not be naïve about how difficult is to outsmart the market. If Wall Street sharks with Ivy League diplomas and expensive investment tools can't beat the indexes, you had better be extremely lucky or amazingly gifted to do differently.
Don't give in to fear and greed
Here's the thing: While hyped-up marketing messages sell you fancy advisory services, they rarely deliver. But even skeptical investors fall for them all the same because they fall prey to the old tactics of fear and greed that are so much a part of Wall Street salesmanship.
Right now is the perfect time for many marketers to get their hooks in unwitting investors. We just closed the books on a fantastic 2013 -- a year that bulls can use to fuel promises of a repeat performance, or that bears can use to warn we are poised for a crash.
I don't know for sure which way the market goes, but I do know one thing for certain: A diversified portfolio performs well long-term regardless of which side is winning the tug-of-war between fear and greed.
Of course, you have to be patient. And that's not exactly a great word to build an ad campaign around.
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"China is slowly becoming the owner of this country."
It kind of looks like that now, but by the end of 2014, China will be asleep again and the rest of the world will be scrambling to revive what corrupt inheritors set-up. A reminder that here in America, we don't have the factories, machinery, skills and craft workforce and operations to generate everything we need to survive. It will take 14 years to revive the textile industry alone. We all have to agree that college degrees cannot DO anything, only experience and ability can. Flushing administrators out and locating the last known competent supervision with hands-on ability will be miraculous, but without it found, we are going to be in a very difficult position and place. If you have to look up how to dig a hole on You Tube, you need to be buried in it.
Fish some if you like with the new fangled high flying next invention but make sure its money you can afford to lose...
You may not be the next overnight billionare with this strategy, but you'll make money over time.
More importantly, you'll be able to sleep sound when the market drops a few hundred points like yesterday without worrying about what to sell in a panic.
First of all you can Redistribute wealth and the SuperRich already have. Clearly this posters has not been paying attention. They waged Class Warfare and WON. Everyone else lost.
Most legit folks are tired of hearing posters like Colinyo complaining that any Article that doesn't spew hate on Obama is Left Leaning. Colinyo is the very Problem he speaks of. Look in the freaking Mirror. Did the Banks Work, Save, and invest when they Scammed the Global Economy into $500-700Trillion in Fake Derivative Debt? Heck no. Nor is many others in Corporate America any Different. Fact is, it's many times overseas Slave Labor doing all the Work.
So everyday, regardless of what the Topic is, Fake Conservatives feel the Need to spew hate Obama as to actually coming up with Legit Ideas that Work. Claiming you Worked hard is not going to change a darn thing. Everybody is working hard. Corporate America has made sure of that. However, everybody isn't getting paid a living Wage. Corporate America has made sure of that also.
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