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Investing
Expect Ups and DownsStung by three straight years of stock market declines, many people have been shifting to lower-risk investments.
But if there's a lesson in the past few years, it's that your portfolio should be able to keep its head above water during prolonged stock market declines and be positioned to grow when the market and economy soar. Taking too much risk can hurt your portfolio's growth rate, but so can hiding out in ultra-safe investments paying 1% or less.
DO own a strategic mix of stocks, advises Mark Gutner, a financial advisor in Garden City, New York. "The asset allocation I recommend for people in their late 40s or early 50s is 60% stocks and 40% bonds," he says. "Then you just have to invest regularly and stick to your allocation regardless of whether the economy is up or down."
DO use mutual funds for stock and bond allocations because they offer the most diversification -- thousands of different types of securities in some cases, Gutner advises. "Total market" index funds are a preferred choice, he says, because they provide enormous diversification and mirror the per- formance of specific stock and bond market indexes without generating excessive taxes.
DO consider investing in funds that you'll hold on to for more than a year. Under the new tax law, long-term capital gains (profits on assets you've owned for over a year) are taxed at a maximum of 15%, down from 20%.
DO look at stock funds that pay dividends. Dividends on stocks used to be taxed at your personal income tax rate. Under the new law, they are now taxed at no more than 15%. Utility-stock funds and dividend-growth funds increase dividend payments annually, says Gutner. Investing in these funds will not only hold down taxes but will also sustain your portfolio's value in tough times, he adds.
Forget High Fees
Over the next ten years, achieving the kind of double-digit returns we experienced over the past 20 years will be much harder, predicts Harold Evensky, a certified financial planner in Coral Gables, Florida. "In the 1990s, the average rate of return for a portfolio allocated 60% to stocks and 40% to bonds was 13.2% after taxes and transaction expenses," he says. Over the coming decade, this rate is expected to be closer to 5.5% as the 50-year historical average returns to the neighborhood of 8%.
DON'T pay unnecessarily high investment costs and fees, Evensky says. That money could instead be in your account earning returns. For example, if you can save half a percentage point on your fund expense ratio (the fee that funds charge you each year to manage your money), your average investment return could be 6% instead of 5%, he says.
DO consider investing in no-load funds -- which charge the lowest possible ratio in their respective category -- to reduce your expenses, says Bryan Totri, a certified financial planner with Wellspring Planning in Roswell, Georgia.
The difference in returns can be significant. For example, a $10,000 investment in a fund with an annual return of 8% and annual charge of $1.10 for every $100 invested would grow to $37,359 in 20 years. But if that charge was less than a percentage point higher -- to $1.74 for every $100 invested -- the same investment over 20 years would only grow to $32,810.
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