4/9/2013 6:45 PM ET|
3 rules to rescue your retirement
Two top money experts have a strategy that helps investors keep costs under control and beat the market (just a little) without getting burned.
Burton Malkiel and Charley Ellis are interested in your money.
They don't want your money. In fact, these two respected investing experts want you to spend less on the mutual funds and other retail products that Wall Street peddles to Main Street investors.
Malkiel is author of the investing classic "A Random Walk Down Wall Street," while Ellis penned the pioneering "Winning the Loser's Game." And together, they've written a tidy little treatise called "The Elements of Investing."
Both Malkiel and Ellis are vocal proponents of indexing as the best, most-appropriate portfolio strategy for individual investors. You've come in contact with their work if you've ever bought an index fund or an exchange-traded fund, or follow a patient, long-term investment approach.
Malkiel and Ellis also are advisers to a new venture geared to helping investors manage individual retirement accounts. Rebalance IRA is the brainchild of Mitch Tuchman, founder and CEO of investment manager MarketRiders, which constructs low-cost portfolios for do-it-yourself investors. (Tuchman is an occasional columnist for MarketWatch, the publisher of this report.)
In a recent telephone interview, Malkiel and Ellis spoke about how to maximize yield, safety and capital gains during what they expect will be a lengthy period of below-average total returns from stocks.
Rule No. 1: Costs matter
Lower your investment costs and treat the market as an ally, not an enemy, Malkiel and Ellis encourage. This proactive approach makes it more likely that you'll have more funds for a financially comfortable retirement, which is what Malkiel and Ellis really want to see.
This line of thinking is crucial, they contend, since we're currently in a challenging investment environment.
It's highly likely that U.S. stocks will deliver below-average total returns over the coming decade, with the 10-year Treasury yield -- the "risk-free" return -- so low, Malkiel and Ellis say.
Tack on four percentage points -- the historical "equity-risk premium" over the Treasury benchmark -- and Malkiel and Ellis are looking at no more than around a 6% annualized 10-year return from stocks, including dividends and before inflation.
Investment charges can take a big chunk of that gain -- for example, a 1.5% annual management fee isn't uncommon, but it represents 25% of a 6% take.
"Cost, particularly in an era of low returns, is tremendously important," Malkiel says.
Moreover, a low-cost, diversified basket of stocks stands a good chance of beating inflation, so don't get too fancy. Be careful about investing in high-risk ventures in an attempt to boost income or capital gains. Says Ellis: "We're not entitled to a high rate of return and we shouldn't be reaching for a high rate of return. That's a sucker bet."
Rule No. 2: Rebalance your portfolio regularly
Rebalancing is the one form of market timing that passes the test. In this way, you buy out-of-favor assets when they're cheap and book profits in appreciated holdings. This discipline also keeps you from chasing what's hot and selling what's not.
"Individuals take money out of the market at exactly the wrong time, and put money in at the wrong time," Malkiel says.
"In very volatile markets such as we have had and such as I suspect we are likely to have in the future," he adds, "there's just an enormous advantage in rebalancing because it always reduces risk and in very volatile markets will actually increase returns."
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VIDEO ON MSN MONEY
The rules of investment have never changed,
buy low/sell high.
don't invest money you can't afford to leave alone,
never sell for less than you paid, if you can't hold it, and leave it in the market , you need to store it in a money market account.
The number one rule; always invest in solid proven mutual funds and not individual stocks, individual stocks are a suckers bet.
You notice they didn`t mention, buy rock solid stocks.You don`t have to be a chart expert
to buy VIG.There wouldn`t be any story if people did that.Those are slam dunk stocks.
On the one hand since the "averages" are by definition a collection of individual stocks, it is not possible (explained below) to beat the average over time. This strongly implies we should relax and just buy index funds. One problem is that most of us have at least two problems with this. First we don't like the historical charts of the indexes, they are scary. Look at the Dow in 2007 and then in 2009. Would you have liked to have been in an index fund? This scary picture leads us to the Second point which is that we just think we can protect ourselves from the reality of indexes by going out on our own. The reality is that if we go out on our own and have a diversified portfolio, we actually own an index.
So on the other hand, if you are able and good at it, and can read the tea leaves you can roll your portfolio, not owning a truly diversified portfolio but some kind of weighted portfolio you can beat the market. But are you able and are you good.
I think people should track their individual performance over a 15 year period and see if you have beat the market. But then again you may have taken on more risk to do it.
I enjoy picking stocks, but I believe as I get older I will slowly move into some form of auto pilot. Not sure that will ever be a S&P 500 index fund, but something. Maybe growth mutual funds, and play some rolling sector funds.
What remains of the American middle class is being set up to be finacially raped for the last time. The last time because this time....... there will be no middle class remaining.
It's beyond sad to see the sheep lining up to be shorn.
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