Five Great Lessons for Retirees
Reprinted courtesy of MarketWatch.com.
To read the original article click here.
Over the past few weeks, a lot of retirees have asked me how they can get their investments back on track.
Often I hear some variation of this: “I used to understand the market, but now I just don’t seem to understand what’s going on.” (Translation: I used to be making money, but now I’m not.)
Usually, I’ll hear this from somebody who was spooked by the market in 2008 and 2009 and responded by adopting what I call the “I can’t stand it anymore” timing system. Often that prompted them to sell their equities and move everything into cash or bond funds.
Now, with interest rates at historic lows and no change in sight, they are finding that the “risk-free” investments they were so eager to buy are not meeting their needs (to say nothing of their desires) for a stable retirement income.
They now believe (with the benefit of 20/20 hindsight) that they should have stayed in the market back then. Yet they’re afraid to get in, thinking another plunge could be around the corner. Meanwhile, they are distressed when they must dip into their principal to pay for living expenses.
What’s needed is a plan to rebuild their retirement portfolios and regain their faith in the future. In 10 steps, any investor can do that. Let me show you how.
One: Get the right balance of stock funds and bond funds to meet your long-term needs and still let you sleep at night. Despite the fiscal cliff and the inevitable short-term swings of the market, you’ll feel immediate relief.
Two: If you are paying higher expenses than you have to, cut it out. You may be able to cut your expenses by 1% a year, keeping that money for yourself and your family. Within any asset class, the most reliable way to boost your return is to cut your expenses. You should be the one cruising to the Greek Islands, not your fund manager.
Three: Get out of mutual funds with high portfolio turnover. High turnover can cost as much as 2% a year, or the difference between making 7% and 9%. Over a few decades, that extra cost can cripple your long-term results.
Four: If your money is in a taxable account, pay extra attention to turnover and tax-efficiency. If you have an IRA or 401(k) as well as a taxable account, use the tax sheltered account more to earn dividend income and the taxable account to earn long-term capital gains. Have your financial adviser or your tax adviser help you find the best way to do this.
Five: Don’t pay a sales commission (load) to buy any mutual fund. You may think the commission pays for useful advice. But studies indicate the opposite is often true. That commission, whether you pay it up front or some other way, directly reduces your return.
Six: Even if this is a bit beyond your comfort level, you can give the equity side of your portfolio a huge boost by investing in asset classes with long histories of beating the Standard & Poor’s 500 Index SPX +0.49% . These include small-cap stocks, value stocks, small-cap value stocks and real estate stocks. All those asset classes are valuable in international versions, along with the emerging markets.
Seven: Control your exposure to risk. The panic of 2008 and 2009 was particularly hard on investors who were not properly diversified. When stocks are going up, it’s easy to buy more, disregarding risk. This is a very bad idea. In bad times, people sell when they can’t stand the pain. This is equally bad.
Eight: Give up trying to outsmart the market. If you pay attention, you’ll almost certainly find that, after years of doing your best to choose hot stocks and fund managers, you haven’t been consistently beating the market. Don’t wait to stop this damage to your portfolio. Become an “indexer” sooner rather than later.
Nine: Stop listening to the “advice” you read and hear from Wall Street and the financial media. These institutions are not designed to help you. They are designed to make money. Directly (in the case of Wall Street) and indirectly (in the case of the media), you are the source of that money and their profits. Instead, rely on disinterested sources like the authors I mention below.
Ten: Educate yourself. Everything I’m suggesting will make more sense and be easier if you understand investing. Here are four books I often recommend: “Mutual Funds For Dummies” by Eric Tyson, “The Little Book of Common Sense” by John Bogle, “Your Money and Your Brain” by Jason Zweig and my own 2011 book “Financial Fitness Forever.” You can buy all four for less than $50. If you apply what you learn in those pages, you will almost certainly save and earn at least 100 times that much.
Don’t feel that you have to do everything at once. If the total of these changes seems overwhelming, take them gradually, or with only a part of your portfolio.
Even if it takes five years to appreciate the value of these recommendations, they are worth following.
Richard Buck contributed to this report.