MONEY stocks

As Earnings Shrink, Here’s Where to Hunt for Profits

Zachary Zavislak

Finding pockets of growth is the key to higher returns.

Though the economy is growing and the stock market remains near record highs, one key fundamental indicator has taken a sharp turn for the worse. Corporate earnings, which helped propel this six-year-old bull market, actually shrank in the first quarter. And if profits sink again this spring, as is widely expected, it would “qualify as an earnings recession”—the first since the global financial crisis, says Burt White, chief investment officer for LPL Financial.

With the S&P 500 trading at a price/earnings ratio of 18, which is about 20% above the historical average, diminishing profits are a reason to worry, but not to panic.

For starters, there have been three years since 1974 in which earnings failed to grow without the onset of an economic recession: 1986, 1998, and 2012, when equities posted double-digit gains. What’s more, the biggest drag on overall profits has been energy, where analysts forecast a 58% decline in earnings per share through 2015. Strip out that sector and analysts predict a modest earnings increase in the second quarter.

You just have to know where to look for that continued growth.

See who wins cheap oil

While the oil market collapse has crushed energy companies, the decline in crude prices boosts other parts of the economy. With less money going into filling up their gas tanks, consumers can open their wallets a bit more. No wonder retail sales in March posted their biggest monthly gain in a year.

One industry that benefits from higher consumer spending and lower fuel prices is transportation. A smart way in: SPDR S&P Transportation ETF SPDR SERIES TRUST SPDR S TR/S&P TRANSN ETF XTN -0.18% , which emphasizes cheaper airline stocks over frothier railroad shares. The portfolio’s average P/E is just 14.9, vs. 19.4 for consumer stocks.

Focus on Revenue Growers

The profit boom in the years following the financial crisis had more to do with cost cutting than expanding sales. Eventually, though, “earnings grow because sales grow,” says Pat Dorsey of Dorsey Asset Management.

S&P Capital IQ says the sector with the biggest revenue growth in the second quarter will be health care. The sector is “relatively immune to changes in the economy,” notes Morningstar analyst Karen Andersen.

Still, health care stocks have doubled in the past three years, so you have to tread carefully. Andersen notes that biotechnology stocks look particularly pricey.

One exception is Gilead Sciences GILEAD SCIENCES INC. GILD -0.84% . With a P/E ratio of just 14—thanks to rapidly growing earnings—this biotech giant is priced 30% below its five-year average. This is despite an expected jump in hepatitis C drug sales that alone could add $14.4 billion to Gilead’s revenues this year. Andersen sees earnings growing 11% in 2015.

Ride the Currency Waves

With the U.S. dollar up 22% in nine months, American firms selling to Europe and Asia are at a disadvantage. Not only are their goods more costly to foreign buyers, but they have to convert those sales back into dollars, deflating their results.

One way to avoid the fallout is to stick with truly domestic stocks. Firms (excluding energy) with most of their sales in the U.S. are expected to see 11% profit growth in 2015. Comcast COMCAST CORP. CMCSA 0.14% makes only about 5% of its money abroad, vs. 46% for the S&P 500. Despite the nixed deal for Time Warner Cable, its earnings are expected to grow more than 11% annually for the next five years.

On the flip side, analysts expect European earnings to beat S&P 500 results in 2015, as the weaker euro cuts prices for the Continent’s goods sold abroad. A cheap option is Vanguard European Stock Index VANGUARD EUROPEAN STOCK INDEX INV VEURX -0.03% , which charges just 0.26%.

Look for Growing Dividends

At a time of uncertainty over profits, a good sign companies are confident “in their future prospects” is if they boost dividends, says Haverford Trust chief investment officer Hank Smith.

A bonus: Rising dividends beat the market. Since March 2006, $100 invested in the S&P 500 has grown to $414. The same amount invested in the S&P 500 Dividend Aristocrats index, which tracks stocks that have raised dividends every year for at least 25 years, has become $526. For a solid dividend growth fund, go with SPDR S&P Dividend ETF SPDR SERIES TRUST DIVIDEND ETF SDY 0% , which is in our MONEY 50 list of recommended funds and ETFs.

MONEY stocks

The Fashionable Investing Trend You Should Avoid

Illustration by Taylor Callery

Value investing, the art of finding gems among beaten-down stocks, is a time-honored strategy. But recently a simple approach to value has become fashionable: Instead of hunting for bargains, buy all the stocks in the market, but “tilt” so that you own more of those with low prices relative to earnings or underlying business value. Academic research says it earns some extra return, and now lots of mutual funds and ETFs offer such statistical value plays.

So it might surprise you to learn that from 1991 to 2013, investors in value funds underper-formed the S&P 500 by close to a percentage point a year, according to an analysis of fund data by Research Affiliates.

Does this mean the value premium is overhyped?

No, it’s just misunderstood. The same study showed that value funds beat the market by nearly half a percentage point annually over this stretch. But, on average, investors in those funds didn’t capture that edge, because they traded at the wrong times, piling in when the style was hot and selling only after the funds had underperformed. So before you go after the so-called value effect, keep two things in mind.

Value Isn’t a Short-Term Play

Although there’s evidence that value works in the long run, “you can go decades where value is either in or out of favor,” says Gregg Fisher, chief investment officer for Gerstein Fisher. Indeed, growth stocks—the high-priced antithesis to value shares—largely outpaced the broad market from 1988 to 2000.

“The worst thing you can do is try to time value,” says Jason Hsu, vice chairman at Research Affiliates. If you wait to snap up such stocks until after they’ve done well, you lose part of their advantage—the low prices.

Tilt Lightly (Especially Now)

The investment community has lately gone on a tilting spree. Rick Ferri, founder of Portfolio Solutions, warns that there’s “an awful lot of money going into a small group of securities.” And there’s evidence that the market has changed as a result: The stocks with the lowest price/earnings ratios are now only 15% cheaper than those with the highest P/Es. The value discount has been closer to 35% in the past.

Ferri recommends keeping the majority of your stock portfolio in an index fund or something else that’s in line with the broad market, devoting no more than 25% to value or other kinds of tilts. And don’t do it at all unless you expect to be invested for a long time. Says Ferri: “With all this recent attention, it might take 20 or 30 years before you see the true benefits.”

MONEY Ask the Expert

Have Mutual Funds Lost a Key Advantage Over ETFs?

Investing illustration
Robert A. Di Ieso, Jr.

Q: ETFs seem to be taking the place of mutual funds, but my understanding is that mutual funds are still your best option if you want to reinvest dividends. Is that true? — Bill from Florence, S.C.

A: Once upon a time, there was some truth to this. But the popularity of dividend-focused exchange-traded funds has prompted most brokerages to tweak their policies to accommodate dividend reinvestors.

“From an investor standpoint the experience should be similar, though the process behind the scenes is different,” says Heather Pelant, a personal investor strategist with BlackRock, which manages mutual funds as well as ETFs via the firm’s iShares division.

Before ETFs became widely adopted, some brokerages charged ETF investors a transaction cost for dividend reinvestments, says Pelant. Hence the notion that mutual funds are a better vehicle for reinvesting dividends. “These platforms have since come up with procedures and features that are parallel to mutual funds,” she says.

Today, most large brokerages give investors the option of depositing dividend payouts into their cash accounts or automatically reinvesting dividends back into the security – be it an individual stock, mutual fund, or ETF. You should be able to make this choice on a fund by fund basis, change your preference at any time, and reinvest your dividends for free.

Still, it’s always a good idea to double check your broker’s own policy, lest you get dinged with additional fees.

One way ETFs are different (slightly) from mutual funds is the timing of reinvestments. Mutual fund dividend payouts are reinvested at a fund’s net asset value on the ex-dividend date, which is essentially the cutoff date for new shareholders to collect that dividend.

ETF investors, on the other hand, have to wait for all transactions to settle, typically a few days, to repurchase shares. If share prices swing widely during that short window of time, it could make a difference — for better or for worse.

For most investors, however, this nuance matters far less than all the other factors that go into deciding whether to invest via an ETF or fund.

Meanwhile, dividend reinvesting is a great tool to stay fully invested and systematically buy additional shares over time, says Pelant. Over the long term, these payouts really can add up.

Of course, because different funds will have different payouts, automatically reinvesting dividends could eventually throw off your allocations — even more reason to make sure you periodically rebalance your portfolio.

MONEY ETFs

Humdrum ETFs Are Overtaking Racy Hedge Funds

Tortoise and the hare
Milo Winter—Blue Lantern Studio/Corbis

It's part of a gradual change in culture on Wall Street that's encouraging low costs and long-term thinking.

It’s like the investment world’s version of the race between the tortoise and the hare. And the hare is losing its lead.

Hedge funds, investment pools known for their exotic investment strategies and rich fees, have long been considered one of the raciest investments Wall Street has to offer, with $2.94 trillion invested globally as of the first quarter, according to researcher Hedge Fund Research.

Despite their mystique and popularity, though, hedge funds are about to be eclipsed by a far cheaper and less exclusive investment vehicle: exchange-traded funds.

According to ETF researcher ETFGI, exchange-traded funds — index funds that have become favorites of financial planners and mom and pop investors — have climbed to more than $2.93 trillion. ETFs could eclipse hedge funds as early as this summer, according to co-founder Debbie Fuhr.

In some ways the milestone is one that few people outside the money management business might notice or care about. But even if you don’t pay much attention to the pecking order on Wall Street, there’s reason to take notice.

The fact that ETFs have caught up with hedge funds reflects broader trends toward lower costs and a focus on long-term passive investing, both of which benefit small investors.

Exchange-traded funds, which first appeared in the 1990s and hit the $1 trillion mark following the financial crisis, have gained fans in large part because their ultra-low cost and hands-off investing style.

While there are many varieties of ETFs, the basic premise is built on the notion that investors get ahead not by picking individual stocks and securities but by simply owning big parts of the market.

Index mutual funds have been around for a long time. (Mutual funds control $30 trillion in assets globally, dwarfing both ETFs and hedge funds). But ETFs allow investors to trade funds like stocks, and they can be more tax efficient than mutual funds. Both ETFs and traditional index funds are known for ultra-low fees, sometimes less than 0.1% of assets invested. That means investors keep more of what they earn, and pay less to Wall Street.

Hedge funds by contrast exist for elaborate investment strategies. They are investment pools that in some ways resemble mutual funds, but they can’t call themselves that because they aren’t willing to follow SEC rules designed to protect less sophisticated investors.

Because of their special legal status, hedge funds aren’t allowed to accept investors with less than than $1 million in net worth, hence the air of wealth and exclusivity.

But hedge fund managers also enjoy a lot more freedom in how they invest, for instance, sometimes requiring shareholders to lock up money for months at a time or taking big positions in complex derivatives.

Hedge funds aren’t necessarily designed to be risky — they get their name from a strategy designed to offset not magnify market swings. But hedge fund investors do expect managers to deliver something the market cannot. Otherwise why pay the high fees? Hedge funds typically charge “two and twenty.” That is 2% of the amount invested each year, plus 20% of any gains above some benchmark. No that is not a typo.

Of course, hedge funds’ rich fees wouldn’t be a problem if they delivered rich investment returns. The industry has long relied on some fabulously successful examples to make its case. But critics have also suspected that, like the active mutual fund industry in its 1990s’ heyday, this could be a case of survivorship bias, with a few rags-to-riches stories distracting from more common stories of mediocre performance.

Hedge funds’ performance in recent years seems to be bearing that out. (By contrast ETFs, whose returns are typically tied to the stock market, have benefited from one of the longest bull markets in history.)

Why should you care if a bunch of rich guys blow their money chasing ephemeral investment returns? One reason, is you might be among them, even if you don’t know it. Pension funds are among the biggest hedge fund investors.

The good news: They too are embracing indexing, if not specifically through ETFs. Calpers, the giant California pension fund, said last year that it was dumping hedge funds, while also indexing more of its stock holdings.

Unlike ETFs, hedge funds — because they need to justify their rich fees — often suffer from short-term focus. In recent years, one popular strategy has been so-called “activist investing,” where a hedge fund buys a big stake in an underperforming company and demands changes.

While the stock market often rewards those moves in the short-term, many investors worry moves like cutting costs and skimping on research ultimately make those businesses weaker, hurting long-term investors. It’s no surprise then that one of activist investing’s most outspoken critics is BlackRock Inc. As the largest ETF provider, BlackRock represents the interests of millions of small investors.

And finally, there are those fees. The surging popularity of low-cost investments such as ETFs will inevitably focus more attention on fees, putting pressure on active investment managers — and even hedge funds themselves — to slash prices. And in the the end, that benefits everybody.

MONEY Investing

Why Wary Investors May Keep the Bull Market Running

running bull
Ernst Haas—Getty Images

Retirement investors are optimistic but have not forgotten the meltdown. That's good news.

Six years into a bull market, individual investors around the world are feeling confident. Four in five say stocks will do even better this year than they did last year, new research shows. In the U.S., that means a 13.5% return in 2015. The bar is set at 8% in places like Spain, Japan and Singapore.

Ordinarily, such bullishness following years of heady gains might signal the kind of speculative environment that often precedes a market bust. Stocks in the U.S. have risen by double digits five of six years since the meltdown in 2008. They are up 3%, on average, this year.

But most individuals in the market seem to be on the lookout for dangerous levels of froth. The share that say they are struggling between pursuing returns and protecting capital jumped to 73% in this year’s Natixis Global Asset Management survey. That compares to 67% in 2013. Meanwhile, the share of individuals that said they would choose safety over performance also jumped, to 84% this year from 78% in 2014.

This heightened caution makes sense deep into a bull market and may help prolong the run. Other surveys have shown that many investors are hunkered down in cash. That much money on the sidelines could well fuel future gains, assuming these savers plow more of that cash into stocks.

Still, there is a seat-of-the-pants quality to investors’ behavior, rather than firm conviction. In the survey, 57% said they have no financial goals, 67% have no financial plan, and 77% rely on gut instincts to make investing decisions. This lack of direction persists even though most cite retirement as their chief financial concern. Other top worries include the cost of long-term care, out-of-pocket medical expenses, and inflation.

These are all thorny issues. But investing for retirement does not have to be a difficult chore. Saving is the hardest part. If you have no plan, getting one can be a simple as choosing a likely retirement year and dumping your savings into a target-date mutual fund with that year in the name. A professional will manage your risk and diversification, and slowly move you into safer fixed-income products as you near retirement.

If you are modestly more hands-on, you can get diversification and low costs through a single global stock index fund like iShares MSCI All Country or Vanguard Total World, both of which are exchange-traded funds (ETFs). You can also choose a handful of stock and bond index funds if you prefer a bit more involvement. (You can find good choices on our Money 50 list of recommended funds and ETFs.) Such strategies will keep you focused on the long run, which for retirement savers never goes out of fashion.

Read next: Why a Strong Dollar Hurts Investors And What They Should Do About It

MONEY index funds

The One Investment You Need Most For A Successful Retirement

two men walking toward hole on golf course
Chris Ryan—Getty Images

Market returns may be lower in future. But you can make the most of them by focusing on low-cost funds and ETFs.

Whether you’re still building your nest egg or tapping it for income, you need to re-evaluate your investing strategy in light of lower projected investment returns in the years ahead. The upshot: Unless you’re putting most of your money into low-cost index funds and ETFs, you may very well be jeopardizing your shot at a secure retirement.

As if we needed more confirmation that future investment gains will likely be anemic, investment adviser and ETF guru Rick Ferri recently unveiled his long-term forecast for stock and bond returns. It’s sobering to say the least. Assuming 2% yearly inflation, he estimates stocks and bonds will deliver annualized gains of roughly 7% and 4% respectively over the next few decades. That’s quite a comedown from the 10% for stocks and 5% or so for bonds investors had come to expect in past decades.

Given such undersized projected rates of return, you can’t afford to give up any more of your gain to fees than you absolutely have to if you want to have a reasonable shot at attaining and maintaining a secure retirement. Which means broad-based index funds or ETFs with low annual expenses should be the investment of choice for individual investors’ portfolios.

Check Out: 4 Retirement Mistakes That Can Cost You $250,000 or More

Here’s an example. Let’s say you’re 25, earn $40,000 a year, get 2% annual raises and plan to retire at 65. Back when stocks were churning out annualized gains of 10% and bonds were delivering 5% yearly, you might reasonably expect an annualized return of 8% or so from a 60% stocks-40% bonds portfolio. Assuming 1.25% in annual expenses—about average for mutual funds, according to Morningstar—that left you with an annual return of roughly 6.75%. Given that return, you would have to save about 11% of salary through0ut your career to end up with a $1 million nest egg at retirement.

But look at how much more you have to stash away each year if returns come in at current low projections. If stocks return 7% annually and bonds generate gains of 4%, a 60-40 portfolio would return roughly 6%. Deduct 1.25% in expenses, and you’re looking at an annualized return of 4.75%. With that return, the 25-year-old above would have to save 17% of salary annually to accumulate $1 million by age 65. In short, he would have to increase the percentage of salary he devotes to saving by almost 55% each year, enough to require a major lifestyle adjustment.

There’s not much you can do to boost the returns the market delivers. But you do have some control over investment expenses. Suppose that instead of shelling out 1.25% a year in expenses, our 25-year-old lowers annual costs to 0.25% by investing exclusively in low-cost index funds and ETFs. That would boost his potential return on a 60-40 portfolio by one percentage point from 4.75% to 5.75%. With that extra percentage point in return, our hypothetical 25-year-old would be able to build a $1 million nest egg at 65 by saving 13% of salary annually instead of 17% year. Granted, 13% is still more than the 11% he had to save when he was paying 1.25% annually in expenses and stocks and bonds were delivering higher historical rates of return. But investing low-fee index funds and ETFs clearly gives him a better shot at building a seven-figure nest egg than he would have with funds that charge higher expenses.

Check Out: 10 Smart Ways To Boost Your Investment Results

Holding the rein on expenses in the face of expected subpar returns is just as important when you’re tapping your nest egg. For example, if you follow a systematic withdrawal system like the 4% rule—i.e., draw 4%, or $40,000, initially from a $1 million 60% stocks-40% bonds portfolio and increase that amount each year for inflation—reducing annual expenses by a percentage point will significantly increase the probability that your nest egg will last 30 years or more.

Can I guarantee that you’ll be able to duplicate these results exactly? Of course not. Given the choices in your 401(k) or other retirement accounts, you may not be able to reduce expenses as much as in these scenarios. Even if you can, there’s no assurance that every cent you save in expenses will translate to an equivalent gain in returns (although research shows funds with lower costs do tend to outperform their high-cost counterparts).

And let’s not forget that we’re dealing with projections here. They may very well get it wrong. Even if they’re spot on, you won’t earn that annualized return year after year. Some years will be higher, others lower, which will affect both the size of the nest egg you accumulate as well as how long it will last. It’s also possible that you may be able to generate a higher return than the market ultimately delivers (although doing so typically means taking on more risk).

Check Out: The Retirement Income Mistake Most Americans Are Making

But the point is this: If returns do come in lower than in the past—which seems likely given the current low level of interest rates—the more you stick to low-cost index funds and ETFs, the better the shot that you’ll have at accumulating the savings you’ll need to maintain your standard of living in retirement, and the more likely your savings will last at least as long as you do.

Walter Updegrave is the editor of RealDealRetirement.com. If you have a question on retirement or investing that you would like Walter to answer online, send it to him at walter@realdealretirement.com.

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MONEY mutual funds

Mutual Funds: Not Dead Yet

tombstone proclaiming that Mutual Funds aren't dead yet
Zachary Zavislak

ETFs pose a real threat, but mutual funds can still play a key role in your portfolio. Here are 3 ways to put them to good use.

In many industries, new competition is disrupting the way business is conducted. Think department stores and cable television. Now the $12 trillion mutual fund industry is threatened too.

Since 2007, mutual fund assets have grown less than 50%, while the collective amount invested in exchange-traded funds—baskets of securities that can be traded like individual stocks—has more than tripled, to $2 trillion.

Traditional mutual funds are suffering from the growing popularity of low-cost passive investing. Last year investors poured nearly 10 times as much money into index portfolios, which simply buy and hold all the securities in a sliver of the market, as they put into actively managed funds. And the vast majority of ETFs are index portfolios, many charging lower expenses than mutual funds.

Meanwhile, ETF-like investments could gain traction in the realm of active management.

So far, few actively managed ETFs have been launched because the Securities and Exchange Commission requires them to divulge their holdings in real time — something stock pickers are wary of doing.

However, the SEC recently greenlighted an ETF-like vehicle that solves the disclosure problem. Exchange-traded managed funds, or ETMFs, will be required to reveal their holdings only a few times a year, like traditional mutual funds.

Eaton Vance, which won approval for its NextShares ETMF structure and is licensing it to other money managers, expects to launch its first ETMFs this year.

Because ETFs and ETMFs are traded on an exchange and don’t require back-office and marketing functions, they can charge less. Eaton Vance expects that on average a NextShares ETMF could cost about 0.63 percentage points less than a mutual fund version. So while the average actively managed mutual fund charges $133 a year for every $10,000 you invest, ETMFs may cost just $70 a year.

Still, mutual funds have been around for 91 years and aren’t going the way of the dinosaur tomorrow.

A big reason is that 401(k) plans, which control more than $4.4 trillion in assets, have yet to embrace ETFs. Until that happens—and until ETMFs arrive in full force—here are ways you can still put traditional funds to good use.

Satisfy Your Core Stocks
When it comes to the bulk of your equity portfolio, it doesn’t matter if you use index ETFs or index mutual funds as long as you pick a cheap option. “Low cost is low cost, period,” says Dave Nadig, chief investment officer of ETF.com.

Case in point: MONEY 50 pick Schwab S&P 500 Index mutual fund charges 0.09% annually, the same as SPDR S&P 500 ETF .

As you can see from the chart below, though, not all index mutual funds charge rock-bottom prices.

150306_INV_2

Fix the Bond Problem
MONEY has warned of the risks of putting all your bond money into traditional index funds and ETFs. Those portfolios are obliged to load up on what are now the most expensive parts of the fixed-income market: U.S. Treasuries and agency-backed mortgage debt that the Federal Reserve bought in droves to stimulate the economy.

Jeff Layman, chief investment officer at BKD Wealth Advisors, says his firm has switched from passive core bond funds to active managers, who have the leeway to diversify into less frothy parts of the market. With few exceptions, most actively managed high-grade bond portfolios are mutual funds. A good option is MONEY 50 pick Dodge & Cox Income DODGE & COX INCOME FUND DODIX 0.15% , which charges just 0.43% in annual fees.

Fill a Niche
For narrowly focused assets, Samuel Lee, editor of Morningstar ETFInvestor, says you can find traditional mutual funds with deft active managers who have the flexibility to “avoid horrendous transaction costs.” Surprisingly, some of these funds charge lower expenses than ETFs. For example, he prefers Vanguard High Yield Corporate VANGUARD HIGH-YIELD CORPORATE INV VWEHX 0.17% , an actively managed fund that charges 0.23% a year, over SPDR Barclays High Yield ETF, which charges 0.40%.

Commodities are another area where mutual funds may make more sense. ETFs that invest in physical commodities or futures contracts are less tax-efficient than a regular fund that owns commodity-related stocks.

Collectively these investments represent just a minority of your overall portfolio. Still, it means the death of the fund may be exaggerated—for now.

MONEY stocks

10 Smart Ways to Boost Your Investing Results

stacks of coins - each a different color
Alamy

You don't have to be an investing genius to improve your returns. Just follow a few simple steps.

Recent research shows that people who know their way around investing and finance racked up higher annual returns (9.5% vs. 8.2%) than those who don’t. Here are 10 tips that will help make you a savvier investor and better able to achieve your financial goals.

1. Slash investing fees. You can’t control the gains the financial markets deliver. But by sticking to investments like low-cost index funds and ETFs that charge as little as 0.05% a year, you can keep a bigger portion of the returns you earn. And the advantage to doing so can be substantial. Over the course of a career, reducing annual fees by just one percentage point can boost the size of your nest egg more than 25%. Another less commonly cited benefit of lowering investment costs: downsizing fees effectively allows you to save more for retirement without actually putting aside another cent.

2. Beware conflicted advice. Many investors end up in poor-performing investments not because of outright cons and scams but because they fall for a pitch from an adviser who’s really a glorified salesman. The current push by the White House, Department of Labor and Securities and Exchange Commission to hold advisers to a more rigorous standard may do away with some abuses. But the onus is still on you to gauge the competence and trustworthiness of any adviser you deal with. Asking these five questions can help you do that.

3. Gauge your risk tolerance. Before you can invest properly, you’ve got to know your true appetite for risk. Otherwise, you could end up bailing out of investments during market downturns, turning paper losses into real ones. Completing a risk tolerance questionnaire like this one from RealDealRetirement’s Retirement Toolbox can help you assess how much risk you can reasonably handle.

4. Don’t be a “bull market genius.” When the market is doing well and stock prices are surging, it’s understandable if you assume your incredible investing acumen is responsible for those outsize returns. Guess what? It’s not. You’re really just along for the ride. Unfortunately, many investors lose sight of this basic fact, become overconfident, take on too much risk—and then pay dearly when the market inevitably takes a dive. You can avoid such a come-down, and the losses that accompany it, by leavening your investing strategy with a little humility.

5. Focus on asset allocation, not fund picking. Many people think savvy investing consists of trying to identify in advance the investments that will top the performance charts in the coming year. But that’s a fool’s errand. It’s virtually impossible to predict which stocks or funds will outperform year to year, and trying to do so often means you’ll end up chasing hot investments that may be more prone to fizzle than sizzle in the year ahead. The better strategy: create a diversified mix of stock and bond funds that jibes with your risk tolerance and makes sense given the length of time you plan to keep your money invested. That will give you a better shot at getting the long-term returns you need to achieve a secure retirement and reach other goals while maintaining reasonable protection against market downturns.

6. Limit the IRS’s take. You should never let the desire to avoid taxes drive your investing strategy. That policy has led many investors to plow their savings into all sorts of dubious investments ranging from cattle-breeding operations to jojoba-bean plantations. That said, there are reasonable steps you can take to prevent Uncle Sam from claiming too big a share of your investment gains. One is doing as much of your saving as possible in tax-advantaged accounts like traditional and Roth 401(k)s and IRAs. You may also be able to lower the tab on gains from investments held in taxable accounts by investing in stock index funds and tax-managed funds that that generate much of their return in the form of unrealized long-term capital gains, which go untaxed until you sell and then are taxed at generally lower long-term capital gains rates.

7. Go broad, not narrow. In search of bigger gains, many investors tend to look for niches to exploit. Instead of investing in a broad selection of energy or technology firms, they’ll drill down into solar producers, wind power, robotics, or cloud-computing firms. That approach might work, but it can also leave you vulnerable to being in the wrong place at the wrong time—or the right place but the wrong company. Going broader is better for two reasons: it’s less of a guessing game, and the broader you go the lower your investing costs are likely to be. So if you’re buying energy, tech or whatever, buy the entire sector. Better get, go even broader still. By investing in a total U.S. stock market and total U.S. bond market index fund, you’ll own a piece of virtually all publicly traded U.S. companies and a share of the entire investment-grade bond market. Throw in a total international stock index fund and you’ll have foreign exposure as well. In short, you’ll tie your portfolio’s success to that of the broad market, not just a slice of it.

8. Consider the downside. Investors are by and large an optimistic lot, otherwise they wouldn’t put their money where their convictions are. But a little skepticism is good too. So before putting your money into an investment or embarking on a strategy, challenge yourself. Come up with reasons your view might be all wrong. Think about what might happen if you are. Crash-test your investing strategy to see how you’ll do if your investments don’t perform as well as you hope. Better to know the potential downside before it occurs than after.

9. Keep it simple. You can easily get the impression that you’re some kind of slacker if you’re not filling your portfolio with every new fund or ETF that comes out. In fact, you’re better off exercising restraint. By loading up on every Next Big Thing investment the Wall Street marketing machine churns out you run the risk of di-worse-ifying rather than diversifying. All you really need is a portfolio that mirrors the broad U.S. stock and bond markets, and maybe some international exposure. If you want to go for more investing gusto, you can consider some inflation protection, say, a real estate, natural resources, or TIPS fund. But I’d be wary about adding much more than that.

10. Tune out the noise. With so many investing pundits weighing in on virtually every aspect of the financial markets nearly 24/7, it’s easy to get overwhelmed with advice. It might make sense to sift through this cacophony if it were full of investing gems, but much of the advice, predictions, and observations are trite, if not downright harmful. If you want to watch or listen to the parade of pundits just to keep abreast of the investing scuttlebutt, fine. Just don’t let the hype, the hoopla, and the hyperbole distract you from your investing strategy.

Walter Updegrave is the editor of RealDealRetirement.com. If you have a question on retirement or investing that you would like Walter to answer online, send it to him at walter@realdealretirement.com.

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MONEY portfolio

5 Ways to Invest Smarter at Any Age

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Comstock Images—Getty Images

The key is settling on the right stock/bond mix and sticking to your guns. Here's how.

Welcome to Day 4 of MONEY’s 10-day Financial Fitness program. So far, you’ve seen what shape you’re in, gotten yourself motivated, and checked your credit. Today, tackle your investment mix.

The key to lifetime fitness is a powerful core—strong and flexible abdominal and back muscles that help with everything else you do and protect against aches and injuries as you age. In your financial life, your core is your long-term savings, and strengthening it is simple: Settle on the right stock/bond mix, favor index funds to keep costs low, fine-tune your approach periodically, and steer clear of gimmicks such as “nontransparent ETFs” or “hedge funds for small investors”—Wall Street’s equivalent of workout fads like muscle-toning shoes.

Here’s the simple program:

1. Know Your Target

If you don’t already have a target allocation for your age and risk tolerance, steal one from the pie charts at T. Rowe Price’s Asset Allocation Planner. Or take one minute to fill out Vanguard’s mutual fund recommendation tool. You’ll get a list of Vanguard index funds, but you can use the categories to shop anywhere.

2. Push Yourself When You’re Young

Investors 35 and under seem to be so concerned about a market meltdown that they have almost half their portfolios in cash, a 2014 UBS report found. Being too conservative early on—putting 50% in stocks vs. 80%—reduces the likely value of your portfolio at age 65 by 30%, according to Vanguard research. For starting savers, 90% is a commonly recommended stock stake.

3. Do a U-turn at Retirement

According to Wade Pfau of the American College and Michael Kitces of the Pinnacle Advisory Group, you have a better shot at a secure retirement if you hold lots of stocks when you’re young, lots of bonds at retirement, and then gradually shift back to stocks. Their studies found that starting retirement with 20% to 30% in stocks and raising that by two percentage points a year for 15 years helps your money last, especially if you run into a bear market early on.

4. Be Alert for Hidden Risks

Once you’ve been investing for several years and have multiple accounts, perfecting your investment mix gets trickier. Here’s a simple way to get the full picture of your portfolio.

Dig out statements for all your investment accounts—401(k), IRA, spouse’s 401(k), old 401(k), any brokerage accounts. At Morningstar.com, find “Instant X-Ray” under Portfolio Tools. Enter the ticker symbol of each fund you own, along with the dollar value. (Oops. Your 401(k) has separately managed funds that lack tickers? Use the index fund that’s most similar to your fund’s benchmark.)

Clicking “Show Instant X-Ray” will give you a full analysis, including a detailed stock/bond allocation, a geographic breakdown of your holdings, and your portfolio’s overall dividend yield and price/earnings ratio. Look deeper to see how concentrated you are in cyclical stocks, say, or tech companies—a sign you might not be as diversified as you think or taking risks you didn’t even know about.

5. Don’t Weigh Yourself Every Day

Closely monitoring your progress may help with an actual fitness plan. For financial fitness, it’s better to lay off looking at how you’re doing. A growing body of research finds that well-diversified investors who check their balances infrequently are more likely to end up with bigger portfolios, says Michaela Pagel, a finance professor at Columbia Business School. One reason: Pagel says savers who train themselves not to peek are more likely to invest in stocks. And research by Dalbar finds that investors’ tendency to panic sell in bear markets has cut their average annual returns to 5% over the past 20 years, while the S&P 500 earned 9.2%.

When you have the urge to sell, remind yourself that your time horizon is at least 20 years, says Eric Toya, a financial planner in Redondo Beach, Calif. “Outcome-oriented investors agonize over every up-and-down whim of the market and make poor timing decisions,” he says. “If your process is sound, you don’t need to panic.”

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MONEY retirement planning

How to Save More for Retirement Without Saving an Extra Cent

fingers holding penny
Roy Hsu—Getty Images

Think you can't set aside any more dough than you're already saving? Here's a simple way to grow your nest egg without putting a squeeze on your budget.

If I said you could significantly boost the size of your nest egg without setting aside even a single penny more than you already are and do so without taking on a scintilla of extra investing risk, you’d be skeptical, right? Well, you can. Here’s how.

It’s no secret that the best way to increase your chances of achieving a secure retirement is to boost the amount you save. Problem is, given all the other demands on your paycheck (mortgage, car payments, child expenses, the occasional night out, etc.) how do you find ways to free up more dough for saving?

Actually, there’s an easy way boost your retirement account balances without further squeezing your budget: Stash whatever money you do manage to save in the lowest-cost investments you can find. This simple tactic has the same effect as contributing more to your retirement accounts, making it the financial equivalent of upping your savings rate.

How big a jump in your effective savings rate are we talking about? That depends on how much you cut investment fees and how long you reap the benefits of those lower costs. But over time the increase in your effective savings rate can be quite meaningful, as this example shows.

Let’s say you’re 35, earn $50,000 a year, receive 2% annual raises, and contribute 10% of your salary to a 401(k) that earns a 7% a year before fees. If you shell out 1.5% annually in investment expenses, by the time you’re 65 your 401(k) balance will total just under $465,000.

Reduce your annual investment costs from 1.5% to just 1%—hardly a heroic effort—and you’re looking at a nest egg worth roughly $505,000. To end up with that amount while still paying 1.5% in annual fees, you would have to boost your annual 401(k) contribution to 10.8%. Which means that lowering expenses by a half percentage point in this case is essentially the same as saving nearly a full percentage point more each year, except you don’t have to reduce your spending to do it.

And what if you take an even sharper knife to investing costs?

Well, cutting expenses from 1.5% to 0.5% a year would give our hypothetical 35-year-old a 401(k) balance of just under $550,000 at age 65, or the equivalent of saving 11.8% a year instead of 10%. And if you’re able to really cut investment fees to the bone—say, to 0.25%—that nest egg’s value would balloon to just over $573,000. To reach that size while paying 1.5% annually in investing costs, our 35-year-old would have to contribute 12.3% of pay.

By the way, lowering investment costs can also have a big payoff after you’ve stopped saving and have begun tapping your nest egg for retirement income. For example, a 65 year-old with a $1 million nest egg split equally between stocks and bonds who wants an 80% chance that his savings will sustain him for at least 30 years would have to limit himself to an initial draw (that would subsequently rise with inflation) of just under 3.5%, or a bit less than $35,000, assuming annual expenses of 1.5%.

Cut that levy from 1.5% to 0.5%, and he would be able to boost that inflation-adjusted withdrawal to almost 4%, or $40,000, while maintaining the same 80% probability of savings lasting 30 or more years.

Of course, the results you get may vary for any number of reasons. For example, if you’re doing most of your saving through a 401(k) and your plan lacks good low-cost investment options, your ability to turn lower expenses into a higher account balance will necessarily be limited. And even if you are able to home in on investments with rock-bottom costs, there’s no guarantee that every dollar of cost savings will translate to an extra dollar in your account.

That said, unless every cent of your savings is locked into an account that offers only high-expense investments, you should be able to get some money into cost-efficient options. At the very least you can steer savings in IRAs and taxable accounts into low-fee index funds and ETFs (some of which charge as little as 0.05%). And while cutting investing costs can’t guarantee a larger nest egg, Morningstar research shows that funds with the lowest expense ratios tend to outperform their higher-fee counterparts.

One final note. While targeting low-expense investment options is certainly an effective and painless way to boost the size of your nest egg, you shouldn’t let low costs do all the work. Indeed, if you focus on low-fee investments and increase your contributions to 401(k)s, IRAs and other retirement accounts, that’s when you’ll see your savings balances really take off.

Walter Updegrave is the editor of RealDealRetirement.com. If you have a question on retirement or investing that you would like Walter to answer online, send it to him at walter@realdealretirement.com.

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