Top experts and Money readers share their smartest tips for helping you build your nest egg and land a dream job.
Unearth undervalued investment
It might not be crazy to take a 3.5% mortgage to buy a retirement home — for half what it would’ve cost in 2007.
I’ve long liked timber stocks, like Plum Creek Timber , because trees keep growing even as the prices they fetch — and the value of the land they sit on — may rise also.
Keep enough in cash so that when the next crisis hits, you don’t have to panic — and will have funds available to take advantage of new bargains.
– Andrew Tobias, author, The Only Investment Guide You’ll Ever Need
Learn how to spot a cheap stock
Two years ago everything was on sale, which is not so much the case anymore. But there’s still opportunity, particularly with higher-quality stocks.
Look at the history of a company’s price-to-sales ratio. Sales figures are harder to manipulate than earnings and give you a clear sense of whether a company is selling something that people want to buy.
– Harin de Silva, president of Analytic Investors
Force yourself to buy lo
The best piece of investing advice I got came from finance professor Eugene Fama [considered the father of modern finance] when I was in graduate school.
He persuaded me I wasn’t going to be able to time the markets. So we spend a lot of time rebalancing — selling stocks that no longer fit a fund’s profile and buying those that do. When the markets are good, like this year, we rebalance. It takes nerve to do sensible things when everybody else is panicking
– David G. Booth, founder of Dimensional Fund Advisors
Demand to be paid immediately
With stocks, make sure you truly trust the underlying business and are getting something in return. Don’t be willing to give your money away and just hope for a rise in price. I expect a cash stream, in the form of dividends, as a quid pro quo for my investment. In the long run, dividend payments represent the vast majority of stock returns.
– Daniel Peris, manager of the Federated Strategic Value Dividend Fund and author of The Dividend Imperative
Best tool: Screen for dividend-paying stocks for free at Ycharts.com.
Figure out if you’re a stock or fund investor
On every transaction, there is somebody on the other side. Ask yourself: Do you have the edge or does that other person have the edge? If you don’t think you have any special knowledge, you should buy broad-based mutual or index funds.
– Roger Ibbotson, Yale University finance professor and chairman and CIO of Zebra Capital Management
Make sure you’re paying for skill …
People overestimate the contribution of talent to any individual manager’s performance. If you want to invest with an active manager, you need to figure out if his or her performance is actually the result of skill.
One way to do that is through a measure called “active share,” which shows how different a fund’s holdings are from those of its benchmark. You don’t want to pay high fees for active fund managers if they’re really just closet indexers.
– Michael Mauboussin, Columbia Business School finance professor and author of The Success Equation
… Or save your dough and just buy ETFs
The only reason to invest in actively managed funds today is because the manager has a long record of beating a benchmark, net of fees. Unfortunately that removes most active funds from consideration. Exchange-traded funds have low turnover and low tax exposure, which helps diminish costs.
Some broad-based ETFs come with expense ratios as low as 0.05%. First identify the asset class you need exposure to. Then adhere to a strict investment allocation strategy.
– Tom Lydon, editor of ETFtrends.com
Best tool: Learn how your fund differs from index funds using Morningstar.com’s X-Ray.
Be wary of short-term risks
Part 1. You have to decide what type of pain you are willing to accept — a fast bleed from a sharp decline in stock or bond prices, or a slow bleed from the loss in purchasing power from earning a near-zero rate on cash.
I’d argue the majority of investors are more likely to make poor investment decisions in a fast-bleed scenario.
You never know the value of liquidity until you need it and don’t have it. Liquidity means holding short-term Treasury securities or short to intermediate high-quality bonds.
- Robert Rodriguez, CEO of First Pacific Advisors and co-manager of FPA Capital. His fund beat the market in the 2000-02 and 2007-09 bears, and he fears there could be another downturn
Part 2. The common misconception is that there is a close link between the economy and investment performance. Right now, the economy is expanding at a pedestrian 2% pace, unemployment is a very high 7.5%, and corporate profits are barely growing. Yet stock prices are up a whopping 15% from the beginning of the year.
The market has gotten ahead of the slowly improving economy. So don’t buy stocks now expecting a short-term gain. Buy stocks for the long run.
Even through the inevitable ups and downs in the economy, the prospects for American companies are about as good as they get.
– Mark Zandi, chief economist, Moody’s Analytics
Know when to sell a loser
The real secret of investing is to keep your losses small. So many people hang on to a bad investment for too long, in the hopes they will break even. Make sure you have a specific sell point planned out. The number is up to you.
I personally wouldn’t hold onto a stock fund past a 10% drop from a high, but there’s no magic in that number. The magic is in having the discipline to follow through.
If the market then shoots up, you’ve lost opportunity, but that’s not as bad as the losses you could suffer if your investment keeps dropping.
– Ken Sleeper, portfolio manager at the Sierra Funds
Protect yourself against inflation
The proposition that stocks are a hedge against inflation is a fallacy. During the 1970s, when the consumer price index doubled, stocks lost value in real terms.
So people concerned about preserving the purchasing power of their savings should buy U.S. Treasury Series I savings bonds. I bonds provide the ultimate in long-run liquid financial security because they pay the inflation rate.
Right now, a regular six-month Treasury bill is paying less than 1/10th of a percent. I bonds pay the inflation rate, which ran at 1.1% over the last year.
– Zvi Bodie, management professor at Boston University and author of Risk Less and Prosper: Your Guide to Safer Investing
Want to retire before 60? Think massive cuts
The cost of two people living 20 miles from work compounds to $125,000 in lost wealth every decade.
It is usually worth moving, even within the same city, to cut a commute. I moved across Denver to eliminate a 25-minute drive. I once measured that it took only about 80 hours of work to sell a house, buy a new one, and move.
– Mr. Money Mustache, a 38-year-old blogger who saved aggressively, bought stocks and properties, and retired at age 30
How cost cutting helps
Savings needed to generate $39,200* in retirement income: $980K
What you’ll need if you spend $8,000 less a year: $780K
Best tool: Use the savings bond calculator at TreasuryDirect.gov, where you can also buy I bonds.
Insure against outliving your money
It’s really tough to figure how much you should take out every year because you don’t know how long you will live. Longevity insurance is a good option. It is a deferred annuity. You can buy it at retirement so that some money will kick in when you turn, say, 85. That gives you a set number of years you can plan for.
The costs aren’t that expensive since the insurer gets your money for a long time, and there is a chance you might die earlier than expected.
– Alicia Munnell, director of the Center for Retirement Research at Boston College
Make sure you can work at long as you want — and need — to
When you are in your forties and fifties, you have to invest in your health and skills the way you invest in your savings.
If your health is not up to par, you won’t work. You have to work harder to stay in shape and stay competitive. That runs counter to the mythology of slowing down and relaxing. Carpal tunnel syndrome is not a reason to give up work. Buy some voice software!
– Joseph Coughlin, director of the Age Lab at MIT
Why you need to invest in your health
Age workers expect to retire: 65
Age workers actually retire: 62*
Squeeze every penny out of Social Security
If you retire early, your benefits will be reduced by about 6% for each year you are younger than the full retirement age. Most people don’t realize you don’t get the maximum benefit even when you reach full retirement age.
The benefit keeps growing at about 8% a year until you reach 70. So the longer you wait to claim — until age 70 — the bigger the benefit.
– Jean Setzfand, vice president for financial security, AARP
Best tool: To estimate your future benefit, go to ssa.gov/estimator.