MONEY

Most Financial Research Is Probably Wrong, Say Financial Researchers

Throwing crumpled paper in wastebasket
Southern Stock—Getty Images

And if that's right, the problem isn't just academic. It means you are probably paying too much for your mutual funds.

In the 1990s, when I first stated writing about investing, the stars of the show on Wall Street were mutual fund managers. Now more investors know fund managers add costs without consistently beating the market. So humans picking stocks by hand are out, and quantitative systems are in.

The hot new mutual funds and exchange-traded funds are scientific—or at least, science-y. Sales materials come with dense footnotes, reference mysterious four- and five-factor models and Greek-letter statistical measures like “beta,” and name-drop professors at Yale, MIT and Chicago. The funds are often built on academic research showing that if you consistently favor a particular kind of stock—say, small companies, or less volatile ones—you can expect better long-run performance.

As I wrote earlier this year, some academic quants even think they’ve found stock-return patterns that can help explain why Warren Buffett has done so spectacularly well.

But there’s also new research that bluntly argues that most such studies are probably wrong. If you invest in anything other than a plain-vanilla index fund, this should rattle you a bit.

Financial economists Campbell Harvey, Yan Liu, and Heqing Zhu, in a working paper posted this week by the National Bureau of Economic Research, count up the economic studies claiming to have discovered a clue that could have helped predict the asset returns. Given how hard it is supposed to be to get an edge on the market, the sheer number is astounding: The economists list over 300 discoveries, over 200 of which came out in the past decade alone. And this is an incomplete list, focused on publications appearing in top journals or written by respected academics. Harvey, Liu, and Zhu weren’t going after a bunch of junk studies.

So how can they say so many of these findings are likely to be false?

To be clear, the paper doesn’t go through 300 articles and find mistakes. Instead, it argues that, statistically speaking, the high number of studies is itself a good reason to be more suspicious of any one them. This is a little mind-bending—more research is good, right?—but it helps to start with a simple fact: There’s always some randomness in the world. Whether you are running a scientific lab study or looking at reams of data about past market returns, some of the correlations and patterns you’ll see are just going to be the result of luck, not a real effect. Here’s a very simple example of a spurious pattern from my Buffett story: You could have beaten the market since 1993 just by buying stocks with tickers beginning with the letters W, A, R, R, E, and N.

Winning with Warren NEW

Researchers try to clean this up by setting a high bar for the statistical significance of their findings. So, for example, they may decide only to accept as true a result that’s so strong there’s only a 5% or smaller chance it could happen randomly.

As Harvey and Liu explain in another paper (and one that’s easier for a layperson to follow), that’s fine if you are just asking one question about one set of data. But if you keep going back again and again with new tests, you increase your chances of turning up a random result. So maybe first you look to see if stocks of a given size outperform, then at stocks with a certain price relative to earnings, or price to asset value, or price compared to the previous month’s price… and so on, and so on. The more you look, the more likely you are to find something, whether or not there’s anything there.

There are huge financial and career incentives to find an edge in the stock market, and cheap computing and bigger databases have made it easy to go hunting, so people are running a lot of tests now. Given that, Harvery, Liu, and Zhu argue we have to set a higher statistical bar to believe that a pattern that pops up in stock returns is evidence of something real. Do that, and the evidence for some popular research-based strategies—including investing in small-cap stocks—doesn’t look as strong anymore. Some others, like one form of value investing, still pass the stricter standard. But the problem is likely worse than it looks. The long list of experiments the economists are looking at here is just what’s seen the light of day. Who knows how many tests were done that didn’t get published, because they didn’t show interesting results?

These “multiple-testing” and “publication-bias” problems aren’t just in finance. They’re worrying people who look at medical research. And those TED-talk-ready psychology studies. And the way government and businesses are trying to harness insights from “Big Data.”

If you’re an investor, the first takeaway is obviously to be more skeptical of fund companies bearing academic studies. But it also bolsters the case against the old-fashioned, non-quant fund managers. Think of each person running a mutual fund as performing a test of one rough hypothesis about how to predict stock returns. Now consider that there are about 10,000 mutual funds. Given those numbers, write Campbell and Liu, “if managers were randomly choosing strategies, you would expect at least 300 of them to have five consecutive years of outperformance.” So even when you see a fund manager with an impressively consistent record, you may be seeing luck, not skill or insight.

And if you buy funds that have already had lucky strategies, you’ll likely find that you got in just in time for luck to run out.

MONEY mutual funds

The Incredible Shrinking Mutual Fund Manager

Adding machine with miniature financial managers
Zachary Zavislak—Prop Styling by Linda Keil

Index funds are winning big, but there’s still a small place for stock pros in your portfolio.

A generation ago, “actively managed” mutual funds—that is, portfolios run by traditional stock and bond pickers—weren’t just the norm; the managers themselves were larger-than-life figures such as Peter Lynch, John Neff, and Bill Gross.

Today you might not be able to name many of the pros who invest on your behalf, with perhaps the exception of Gross—though not for stellar recent performance, but rather due to the public spat between the “bond king” and Pimco, the firm that Gross put on the map.

This is to be expected. Over the past year, nearly 70% of the new money invested in mutual and exchange-traded funds has gone into index portfolios, like Vanguard Total Stock Market Index, now the biggest fund in the world.

Such funds aren’t really managed at all. They don’t try to pick and choose the “best” investments, but rather hold all the securities in a market benchmark like the S&P 500.

Individual investors aren’t the only ones rethinking their approach. The influential California Public Employees’ Retirement System recently indicated that it intends to embrace more indexing in its $295 billion portfolio.

Why? Countless studies show that forces are stacked against the fund pros, which explains their poor performance (see chart). Over the past five years only two in 10 funds that invest in blue-chip U.S. stocks and three in 10 foreign funds beat their benchmarks.

That doesn’t mean that fund managers no longer have a place in your portfolio. Some — like those in the MONEY 50, our recommended list of funds and ETFs—have beaten the odds. Yet even those managers should play a limited role in your strategy.

Build your portfolio’s foundation with index funds

It’s not that professional investors are all lousy at their jobs. A study of more than 3,000 actively managed stock funds from 1979 to 2011 found that managers on average generated risk-adjusted returns that were actually better than their benchmarks. Trouble is, that’s before factoring in fees.

“There is indeed skill, but the average extra return managers generate is not enough to offset the average extra fees that come with active management,” says Lubos Pastor, a professor at the University of Chicago Booth School of Management, who co-wrote the study.

So use low-cost index funds and ETFs for the core part of your portfolio: your long-term stakes in U.S. and foreign equities and some bonds. While the average actively managed stock fund sports an annual expense ratio of 1.4% of assets, many index funds charge between 0.10% and 0.40%.

Rick Ferri, founder of the advisory firm Portfolio Solutions, suggests indexing at least 75% of your money. “Betting on the passive horse means you might not win every year,” he says, “but you know you are going to at least place.”

 

Index advantage

You can add managers to your core — but only the right kinds

“A low-cost actively managed fund can be as good as or better than an index,” says John Rekenthaler, vice president of research at Morningstar. He compared Vanguard’s low-fee actively managed portfolios in various categories with the firm’s index funds. All funds — both active and index — had total returns that ranked in the top 50% of their category for the past 15 years. But Vanguard’s active U.S. stock funds, international stock funds, and allocation funds actually had better returns than the index funds in those categories.

Examples of cheaper-than-average actively managed funds with a solid record in the MONEY 50 include Vanguard International Growth and Dodge & Cox International. Their annual fees are 0.48% and 0.64%, among the lowest for international equity portfolios. Even better, both are team-managed, which offers you protection in case one of the managers switches jobs or retires.

Treat active funds like specialty investments

There are some niche categories of investments where index funds themselves are costly to run and may not be that diversified. For those reasons, Ferri recommends you skip the index options for municipal or high-yield bond funds.

Also, there may be instances when you’d be willing to pay for unique strategies. FPA Crescent, with an expense ratio of 1.14%, mostly owns stocks. But lead manager Steve Romick is also willing to go to corporate bonds, preferred shares, or even cash if he sees better value.

That kind of flexibility makes it hard to use the fund for the bulk of your holdings. Still, in the past 15 years the fund’s 10% annual return doubled the S&P 500’s gains. And those are the kinds of big results you hope for when taking a chance on a fund manager.

MONEY mutual funds

What Investors in Pimco’s Giant Bond Fund Should Do Now

One-time star manager Bill Gross is leaving. The case for choosing an index fund for your bonds has never looked better.

For many bond fund investors, star fixed-income manager Bill Gross’s sudden leap from Pimco to Janus is a moment to rethink. Gross’s flagship mutual fund, Pimco Total Return long seemed like the no-brainer fixed-income choice. Over the past 15 years, Gross had steered Total Return to a 6.2% average annual return, which placed it in the top 12% of its peers. And based on that track record it became the nation’s largest fixed income fund.

But much of that performance was the result of past glory. Over the past five years, Pimco has fallen to the middle of its category, as Gross’s fabled ability to outguess interest rates faded. It ranks in the bottom 20% of its peers over the past year, and its return of 3.9% lags its largest index rival, $100 billion Vanguard Total Bond Market, by 0.5%.

Nervous bond investors have yanked nearly $70 billion out of the fund since May 2013. Those outflows are driven not only because of performance but also because of news stories about Gross’s behavior and personal management style. Still, Pimco Total Return holds a massive $222 billion in assets, down from a peak of $293 billion, and it continues to dominate many 401(k)s and other retirement plans as the core bond holding.

If you’re one of the investors hanging on to Pimco Total Return, you’re probably wondering, should I sell? Look, there’s no rush. Your portfolio isn’t in any immediate trouble: Pimco has a lot of other smart fixed-income managers who will step in. And even if you can’t expect above-average gains in the future, the fund will likely do okay. The bigger issue is whether you should hold any actively managed bond fund as your core holding.

The simple truth is most actively managed funds fail to beat their benchmarks over long periods. Gross’s impressive record was an outlier, which is precisely why he got so much attention. That’s why MONEY believes you are best off choosing low-cost index funds for your core portfolio. With bond funds, the case for indexing is especially compelling, since your potential returns are lower than for stocks, and the higher fees you pay to have a human guiding your fund can easily erode your gains.

Our MONEY 50 list of recommended funds and ETFs includes Harbor Bond, which mimics Pimco Total Return, as an option for those who want to customize their core portfolio with an actively managed fund. When issues about Pimco Total Return first began to surface, we recommended hanging on. But with Gross now out of the picture, we are looking for the right replacement.

If you do choose to sell, be sure to weigh the potential tax implications of the trade. Here are three bond index funds to consider:

*Vanguard Total Bond Market Index, with a 0.20% expense ratio, which is our Money 50 recommendation for your core portfolio.

*Fidelity Spartan U.S. Bond, which charges 0.22%

*Schwab Total Bond Market, which charges 0.29%

All three funds hold well-diversified portfolios that track large swaths of the bond market, including government and high-quality corporate issues. Which one you pick will probably depend on what’s available in your 401(k) plan or your brokerage platform. In the long-run, you’re likely to get returns that beat most actively managed bond funds—and without any star manager drama.

TIME Investing

The Triumph of Index Funds

CalPERS’ move is a vote for passive investing

It would be reasonable to assume that the professionals running CalPERS, the California pension fund with $300 billion in assets, would be good at picking stocks. Or at least reasonably good at picking other smart people to pick stocks for them. But in the past year, CalPERS has made two decisions that are telling for all investors when it comes to trying to outperform the market.

Late last year, the pension fund signaled its intention to move more assets from active management into passively managed index funds. These are funds in which you buy a market, such as the S&P 500 or the Russell 2000, unlike mutual funds that try to select winners within a given class of equities. More recently, CalPERS said it would also pull out the $4 billion it has invested in hedge funds. Although hedge-fund honchos make headlines with their personal wealth, the industry has significantly lagged the market in the past three years. “Call it capitulation or sobriety: it’s saying that we can’t beat the market and we can’t find managers who can beat the market, and even if they can, their fee structures are overwhelming,” says Mitch Tuchman, CEO of Rebalance IRA, an investment adviser focused on index-fund-only portfolios.

The CalPERS move is a nod to University of Chicago economist Eugene Fama, who won a Nobel for his lifelong work on “efficient markets.” That theory says that because stock prices reflect all available information at any moment–they are informationally “efficient”–future prices are unpredictable, so trying to beat the market is useless. According to the SPIVA (S&P Indices Versus Active) Scorecard, the return on the S&P 500 beat 87% of active managers in domestic large-cap equity funds over the past five years.

Why can’t expert money managers succeed? Researchers from the University of Chicago say there are so many smart managers that they offset one another, gaining or losing at others’ expense and winding up near the market average, before expenses. “Unless you have some really special information about a manager, there’s really no good reason to put your money in actively managed mutual funds,” says Juhani Linnainmaa, associate professor of finance at Chicago’s Booth School of Business. He says the median managed fund produces an average –1% alpha–that is, below the expected return. Some funds do beat their index–what’s not clear is why. “What is the luck factor?” he asks. “Given the noise in the market, it’s kind of hopeless to try to figure anything out of this.” Linnainmaa’s colleague, finance professor Lubos Pastor, also found that mutual funds have decreasing returns to scale. Size hurts a manager’s ability to trade.

Yet even if managers match the market, they’ve got expense ratios that then eat into returns. Index-fund proponents like John Bogle at Vanguard have long preached that fees dilute performance. A 1% difference can be huge. “It’s not 1% of all your money,” says Tuchman, “it’s 1% of expected returns: that’s 16% to 20%.” The average balance in Fidelity 401(k) plans was $89,300 in 2013. While 1% of that is $893, if you earned 8% compounded over 10 years, your balance would be $192,792; at 7% it’s $175,667, a difference of $17,125. Real money, in other words.

Investors are getting the message, pouring some $345 billion into passive mutual and exchange-traded funds over the past 12 months vs. $126 billion in active funds, says Morningstar. “At the end of the day,” says Tuchman, “an index fund is run by a computer, a robot. We don’t want to believe that a robot can beat Ivy League M.B.A.s–and I’m one of them.” What CalPERS seems to be saying is that the game is over. The robot wins.

MONEY retirement planning

The Single Biggest Threat To Your Retirement

Mirror
Shawn Gearhart—Getty Images

You might think a stock market slump or a shaky economy pose the biggest danger to your retirement. But the biggest threat may be looking back at you in the mirror.

There’s no shortage of things that can jeopardize your retirement security. Market slumps, job layoffs, medical expenses, an unanticipated spike in inflation, unexpected financial obligations…the list goes on and on. But as scary as these threats may be, they don’t represent the biggest danger to your retirement security. That would be…

You.

Yes, that attractive devil staring back at you in the mirror every morning.

That’s not to say the other hazards I’ve mentioned can’t diminish your retirement prospects. They can. But the danger we ourselves pose to our retirement security can be more insidious if only because we’re not as likely to be aware of it.

So how, exactly, do we undermine our own retirement success? Here are the main ways, followed by advice on how you can limit self-inflicted damage.

*We have a fear of commitment. I’m not talking relationships here, but the difficulty we have in starting to plan for retirement and, more specifically, beginning a savings regimen early on and sticking with it throughout our career. The latest stats from the Bureau of Economic Analysis show that the U.S. savings rate today hovers just below 6% of disposable income, less than half where it stood in the early 1970s. Even among people earning $100,000 or more, only about a third contribute the max to their 401(k). This reluctance to save isn’t totally surprising. After all, our brains are hard-wired for immediate gratification. The sleek car or fancy duds we can have right now are more appealing to us than financial security down the road.

*We’re too emotional. Just when we should be thinking with our heads, we too often go with our guts. Prime example: When the markets are booming, we feel more ebullient, which makes us more apt to underestimate the risk in stocks and load up on them. After a crash, our ebullience turns to gloom, leading us to overestimate the risk we face and flee stocks for the short-term safety of bonds and cash.

*We don’t follow through. Even when we take the time and effort to come up with a coherent strategy, such as building a diversified portfolio of stocks and bonds that jibes with our appetite for risk, we then sabotage our efforts by failing to adhere to our plan. We know that different returns for different asset classes will knock our portfolio’s balance out of whack over time. Still, we don’t bother to periodically rebalance our holdings to bring them back to their proper proportions. Similarly, even if go to the trouble to go to a good online retirement calculator to figure out how much we need to save to have a decent shot at a secure retirement, we often fail to monitor our progress and make periodic adjustments. Retirement is a multi-decade journey. You can’t set your course once and go on autopilot for 30 years.

*We focus on the wrong things. Instead of focusing on the most important aspects of retirement planning—Am I saving enough? Do I have the right mix of stocks and bonds? How should my spouse and I coordinate claiming Social Security to get more in benefits?—we get mired in the weeds, poring over performance charts for the funds that have the highest returns or endlessly researching exotic new investments that purport to provide more diversification in our portfolios. News flash: In the long run, the single most important thing you can do to improve your retirement prospects is save more. If you focus first on that and then turn your attention to building a simple mix of low-cost stock and bond index funds, you’ll have laid the groundwork for a secure retirement.

Fortunately, it’s possible, if not to completely eliminate, then at least mitigate the threat we pose to ourselves when it comes to retirement planning. We do have a natural tendency to spend, but behavioral research shows that we may be more likely to save for the future if we feel some sort of link with our future selves. One way to establish that link is to check out the Face Retirement tool in RDR’s Retirement Toolbox, which uses age-morphing technology to “introduce” you to your future self. Once you’ve made that connection, you may find it easier to set aside resources today to help the you of tomorrow.

Similarly, you can prevent emotions from wreaking havoc with your retirement by adopting a more disciplined approach to planning. Writing down a savings target—10% to 15% is reasonable—will make you more likely to adhere to it than a mere mental note to yourself to try to put some money away. Sign up for your 401(k) plan and elect to have that target percentage deducted from your paycheck, and boom! You’re overcoming both the fear to commit and the failure to follow through. Set an annual date—your birthday, day after Thanksgiving, whenever—to rebalance your retirement portfolio and check your progress with an online retirement planning calculator, and you’re doing an even better job on the follow-through front

The reality is that today the onus is increasingly on you to provide for your security in retirement. So the more you’re able to turn yourself into an asset that enhances your future financial prospects rather than a threat that diminishes them, the more secure and enjoyable a retirement you’re likely to achieve.

Walter Updegrave is the editor of RealDealRetirement.com. He previously wrote the Ask the Expert column for MONEY and CNNMoney. You can reach him at walter@realdealretirement.com.

MONEY stocks

WATCH: What’s the Point of Investing?

In this installment of Tips from the Pros, financial advisers explain why you need to invest at all.

MONEY

Why People Love Risky Investments

Shark Tank production still
As Shark Tank viewers know, an individual company can make for a compelling story. But investing in that story has its risks. Michael Ansell—ABC

Some of the safest-looking places for putting your money are more hazardous than they appear. Here's why that's true.

Which investment involves lower risk: Putting your money in one company? Or buying shares in an S&P 500 index fund?

Nearly all financial advisers and many clients know that the index fund is much more diversified and therefore has less risk. Yet it is easy for clients to forget this basic fact when the chance to invest in a particular company presents itself.

When clients ask me to evaluate opportunities to invest in a private company, the stories are often compelling at first. Clients have brought me opportunities ranging from a marketing company looking to lower its costs by buying in bulk to a niche social media company looking to grow its user base. Almost all of the investments come from a trusted source, such as a long-time friend. But once I dig deeper into a company, I usually find major red flags.

Most of the time, I convince clients to pass on individual company investments. Occasionally, we agree that a small investment is acceptable. And sometimes a client will choose, despite the risks, to invest more in a small company than I would recommend.

Why does this happen?

Why Clients are Tempted to Invest in Private Companies

I see a few reasons why concentrated investments in private companies may tempt clients — even those who fully understand the importance of diversification. A personal connection is powerful. If you believe someone to be a good person overall, you’re more likely to trust him and assume that he’ll make a successful business partner too. While viscerally reassuring, this familiarity may make investors overconfident in a company’s prospects. Even with good intentions, skill, and an attractive market, unforeseen problems can still ruin individual company investments.

Clients can also get a skewed perception of the success rate of individual-company investing for the same reason that it seems like your Facebook friends are always on vacation or eating great meals: It’s fun to talk about your winners. You can see this tendency on display in the TV show Shark Tank. After a wealthy “shark” invests in a company, the producers provide updates that highlight the successes but don’t mention the failures.

Financial advisers can sometimes share the blame for clients’ interest in individual company investing. We know that it’s important to focus on the big things in clients’ lives, such as how much they save and their overall asset allocation. As a result, we spend so much time talking about markets in the abstract that we sometimes forget to emphasize that markets and indices are composites of many individual companies. We talk about the forest, but clients don’t see any of the trees.

Refocusing on a Diversified Portfolio

If people are inclined to believe that the market as a whole is overvalued, it can be hard to convince them to invest broadly without telling a good story, with identifiable characters. Even if you allocate to broad index funds, that doesn’t mean there’s no story to discuss. Individual companies like Apple, Exxon or Procter & Gamble are large components of the S&P 500 that can easily make the investing story relatable for clients. While one company’s impact on a portfolio is likely negligible, discussing it in more detail can improve clients’ understanding of their investments and remove the false impression that private companies are the only ones that prosper.

If a client is insistent on a more concentrated portfolio, adding a small stake in a private equity fund might be an attractive alternative to directly investing in a private company. Although these funds are riskier than mutual funds, they still incorporate professional management and some diversification.

If a client wants to pursue individual company investments because they’ve gotten wrapped up in a compelling story, remind them that the most interesting investing stories can often result in expensive lessons. Discuss the specific investment’s risks, mention the biases that may be influencing their behavior, and — if all else fails — consider telling a better story.

—————————————-

Benjamin Sullivan is a manager at Palisades Hudson Financial Group, where he helps the firm’s high-net-worth clients with their personal financial planning, investment and tax planning needs. He is a certified financial planner certificant, an IRS enrolled agent, and a member of the New York chapter of the Financial Planning Association.

MONEY retirement planning

3 Easy Moves That Can Boost Your Nest Egg By 60%

201412_RET_NESTEGG
Brad Wilson—Getty Images

These relatively painless investing tweaks can put you on the path to a secure retirement, even if you just do one or two of them.

Think you’ve got to come up with a big score or magnificent coup to boost the size of your nest egg and dramatically improve your retirement prospects? You don’t. A few simple tweaks can often make the difference between scraping by and living large after you retire.

In fact, you can put yourself on the path to a much more enjoyable and secure retirement with just three relatively easy moves: saving a little more, paring investment expenses and delaying retirement a bit. Here’s an example.

Let’s say you’re 30 years old, earn $45,000 a year, get annual raises of 2% and contribute 10% of your pay to a 401(k) or similar plan. And let’s further assume that your retirement savings earn a 7% annual return before expenses, for a net return of 5.5% after investment fees of 1.5% a year. Based on that scenario, by age 65 you would have a nest egg valued at just under $600,000.

Not bad, and certainly more than what most people age 65 have accumulated today. But you can put yourself in a much better position at retirement time if you make the three adjustments I mentioned.

First, let’s see how much saving more can help. If you increase your savings rate from 10% a year to 12%, that move alone would boost the age-65 value of your nest egg from just under $600,000 to nearly $715,000. That’s a gain of roughly $115,000, or almost 20%, right there.

Next up: investment fees. With the multitude of index funds, ETFs and other low-cost choices that are around these days, paring annual investment expenses is eminently doable. So, for the sake of this example, let’s assume you cut annual fees by just 0.5% a year from 1.5% to 1%, for an after-expense return of 6% instead of 5.5%. That reduction in expenses alone would add another 10% or so to the age-65 401(k) balance, pushing it from a little under $715,000 to nearly $790,000.

Now for the third move: delaying retirement a few years. This single adjustment has a two-barreled effect on your nest egg. Postponing gives you a chance to throw more savings into your retirement accounts and it gives the money in those accounts more time to grow before you start drawing on it. Waiting three more years to exit the workforce in the scenario above would bump the age-65 value of your nest egg from just under $790,000 to just over $975,000, just short of seven-figure territory.

By the way, postponing your job-exit date can also improve your retirement outlook in another way: Each year between the ages of 62 and 70 that you delay claiming benefits, the size of your Social Security check increases roughly 7% to 8%, and that’s before annual adjustments for inflation. To see how different claiming ages might affect your Social Security benefit (and your spouse’s, if you’re married), check out the calculators in RealDealRetirement’s Retirement Toolbox.

In short, making these three moves combined would have boosted the value of your nest egg in this scenario from a little less than $600,000 to almost $1 million, an increase of some 60%. That’s pretty impressive.

Of course, you may not be able to replicate these results exactly. If you’re getting a late start in your savings regimen, increasing your savings rate may not translate to as sizeable an increase in your eventual balance. Similarly, if you do most of your saving through a 401(k) plan that doesn’t include low-cost index funds and such–although most plans do these days—you may not be able to cut investment expenses as much as you’d like. Even if you’re able to pare expenses, there’s no guarantee that each percentage point reduction will mean a percentage-point increase in return, although there’s plenty of evidence that funds with lower costs do generally perform better.

And while many people may want to work a few extra years to fatten retirement accounts, health problems or company downsizing efforts may not allow you the choice of staying on the job a few extra years.

Still, the point is that these three moves, individually or combined, can likely improve your retirement outlook at least to some extent. And they’re much more effective at enhancing your retirement prospects than the move that many mistakenly gravitate to: investing more aggressively, which is a tactic that can backfire and leave you worse off.

So re-assess your retirement planning to see which of these moves makes the most sense for you. If doing just one gives you the boost you need to assure a secure retirement, fine. But if just one won’t do it, try to do two, or all three. Come retirement time, you’ll be glad you made these tweaks.

Walter Updegrave is the editor of RealDealRetirement.com. He previously wrote the Ask the Expert column for MONEY and CNNMoney. You can reach him at walter@realdealretirement.com.

MORE FROM REAL DEAL RETIREMENT:

Gut Check: Will You Be Prepared If Stocks Plummet?

5 Tips For Charting Your Retirement Lifestyle

Courage: And 3 Other Qualities You Need To Better Plan For Retirement

MONEY retirement planning

4 Simple Rules For Juicing Up Your Retirement Fund

Juicing a lemon
Tooga—Getty Images

These basic yet effective moves can help you get the investment gains you need without taking on outsize risk.

With financial pundits incessantly speculating about where stock prices are headed or blathering about a seemingly endless stream of “revolutionary” new investment products, you could easily get the impression you need to constantly revamp your retirement portfolio. But guess what? You don’t.

In fact, you’re more likely to hurt your retirement prospects by focusing on the ups and downs of the market and overdiversifying into fad investments. A better strategy: stick to a few simple but effective principles that can help you get the investment gains you need without incurring outsize risks.

Here are four tips that can help you add juice to your retirement portfolio’s performance and boost your odds of achieving retirement security.

1. Focus on building a portfolio, not picking funds. Many people think smart investing starts with selecting specific funds. But that approach is backwards. Before you start homing in on individual funds or any other type of investment, you need an overall plan.

Specifically, you want to put together a portfolio that not only includes stock and bond funds, but a broad range of both (growth and value stocks, large shares and small; government and corporate bonds). The aim is to create a diverse group of investments that don’t all move in synch with one another. This way, when one part of your portfolio is getting routed, another part can be racking up gains—or at least not get battered as badly.

The mix of stocks and bonds you own should be based on factors such as your age, your investing goals and your tolerance for risk. Generally, the younger you are, the more of your money you’ll want in stocks.

For guidance on creating such a portfolio, you can check out the investing tools in the Real Deal Retirement Toolbox. If you find the idea of building your own portfolio daunting, consider a target-date retirement fund, an all-in-one fund that includes a diversified mix of stocks and bonds and that becomes more conservative as you age. Though far from perfect, target funds are a good choice for people who can’t or don’t want to build a portfolio on their own.

2. Seek to track, not beat, the market. Aspiring for “average” results by investing in index funds or ETFs that track the performance of market benchmarks strikes some as an admission of failure. It shouldn’t. If you earn the average market return—or something close to it—you can grow your retirement stash substantially over time.

If ten years ago you had invested $10,000 in a total stock market index fund—a fund that tracks the entire U.S. stock market—you would have earned an annualized return of almost 9% and be sitting on a stash worth more than $23,000 today.

Sure, some funds did better. But most didn’t, and it’s hard if not impossible to identify in advance the ones likely to outperform. Indeed, S&P Dow Jones’s latest “Persistence Scorecard” shows that very few funds can consistently outperform their peers. Besides, what sometimes looks like superior performance is just a fund taking on a lot more risk, which makes it more vulnerable to market setbacks.

If you stick to broadly diversified stock and bond index funds, you can avoid the whole fund-picking racket, and fare much better than investors who are constantly seeking out hot funds.

3. Control your emotions. When the markets are surging, people tend to get overconfident about their investing abilities and underestimate the risk they’re taking. That’s one reason investors pour so much money into stocks after the market’s been on a run.

By contrast, in the wake of a market crash investors become overly cautious and often dump stocks and huddle in bonds and cash, even though stocks are usually more attractively priced after big downturns.

You’re much better off avoiding this emotional roller-coaster ride and maintaining your composure. Once you’ve created a portfolio of stocks and bonds that makes sense for you, you should largely avoid tinkering with it whatever the market is doing, except to rebalance back to your original asset mix periodically (say, once a year). By taking your emotions out of the game and adhering to the simple disciplined strategy of rebalancing back to your target stocks-bond mix, you’ll avoid the classic investor mistake of loading up on assets when they’re likely overpriced and selling after they’ve taken a beating and may be bargains.

4. Rein in costs. People tend to gravitate toward investments that have recently posted the highest returns. But returns are highly volatile. And a fund or stock that’s topping the performance charts one year may be an also-ran the next.

Expenses, on the other hand, are much more predictable. A fund that has much higher management fees than its peers will probably stay that way—its costs aren’t likely to go down. And since each dollar you pay in expenses lowers your net return, bloated fees act as a drag on a fund’s performance. Over the long-term that can seriously stunt the size of your retirement nest egg.

That’s why low-cost funds tend to outperform their high-fee counterparts over long periods of time. Which is another argument to stick mostly to index funds, which typically have some of the lowest expenses around. You can screen for low-cost funds by going to the Basic Screener in the Tools section of Morningstar.com. (The tool is free, but registration is required.)

There are no guarantees in investing. But if you follow the four tips above, you should be able to substantially boost the value of your nest egg without subjecting it to undue risk.

Walter Updegrave is the editor of RealDealRetirement.com. He previously wrote the Ask the Expert column for MONEY and CNNMoney. You can reach him at walter@realdealretirement.com.

More from RealDealRetirement.com:

Why Saving Trumps Investing When It Comes To Retirement

10 Tips To Supercharge Your Savings

Worried You’ll Outlive Your Nest Egg? Tilt the Odds in Your Favor

MONEY stocks

Stock-Pickers Can’t Keep Up With the Aging Bull Market

Running of the bulls
Simon Greenwood—Getty Images/Lonely Planet Image

The big companies favored by mutual fund managers have substantially underperformed the S&P 500 index this year.

Even fund managers’ best ideas are not working out this year.

In one sign of the poor performance of stock picking by fund managers as the U.S. stock market continues to rally, the largest overweight positions by large-cap fund managers substantially underperformed the broad Standard & Poor’s index over the first half of the year, according to a Goldman Sachs research report.

Those stocks which were the most shunned, meanwhile, posted above-average returns.

Visa, the most overweight position among the 485 large-cap funds included in the Goldman Sachs study, is down 0.4% for the year, while Exxon Mobil, the most underweight, is up 1.1% over the same period.

Overall, well-loved stocks gained 6% on average for the year through June, while the S&P 500 gained 8% over the same time. The most underweight stocks, by comparison, rallied by an average of 10 percent, according to the report.

The underperformance of active fund managers comes at a time when stock pickers were expected to prosper. The aging bull market, which began in 2009, and falling stock market correlations after last year’s big rally were supposed to make 2014 a time when fund managers would be rewarded for picking companies based on their fundamentals.

Yet poor stock selection is one reason why just one in five actively managed large-cap stock funds are beating the S&P 500 for the year so far. Typically, about 40% of managers best the S&P 500 over the same period, said Todd Rosenbluth, director of fund research at S&P CapitalIQ.

“What funds need to do to outperform is find unloved stocks and get in front of it. If they hold the same stocks that other managers are overweighting, then it’s more likely that they are just going to tread water,” Rosenbluth said.

Underweight stocks’ performance this year seems to bear that out. Shares of Goodyear Tire & Rubber, the company with the largest underweighting among consumer discretionary stocks, is up nearly 16% for the year to date, while shares of Essex Property Trust, the most underweight financial company, have rallied 32%.

Other companies with significant underweighting include Apple, PepsiCo, and Ventas, according to the Goldman report.

The lack of a significant market pullback could be another reason for the underperformance, Rosenbluth added. The S&P 500 has not had a pullback of 10%, known as a correction, in three years. That has made it hard for managers who sold during last year’s 30% rally in the S&P 500 to find places to invest their cash, he said.

“Some managers were prudent and sold during the rally, and now they are left wondering what to do,” he said.

Your browser, Internet Explorer 8 or below, is out of date. It has known security flaws and may not display all features of this and other websites.

Learn how to update your browser