MONEY investing strategy

122 Ideas, Quotes, and Stats That Will Make You a Better Investor in 2015

Traders work on the floor of the New York Stock Exchange on November 21, 2014 in New York City.
Spencer Platt—Getty Images

Start the new year off right with this investing wisdom.

A year ago I started writing what I hoped would be a book called 500 Things you Need to know About Investing. I wanted to outline my favorite quotes, stats, and lessons about investing.

I failed. I quickly realized the idea was long on ambition, short on planning.

But I made it to 122, and figured it would be better in article form. Here it is.

1. Saying “I’ll be greedy when others are fearful” is easier than actually doing it.

2. When most people say they want to be a millionaire, what they really mean is “I want to spend $1 million,” which is literally the opposite of being a millionaire.

3. “Some stuff happened” should replace 99% of references to “it’s a perfect storm.”

4. Daniel Kahneman’s book Thinking Fast and Slow begins, “The premise of this book is that it is easier to recognize other people’s mistakes than your own.” This should be every market commentator’s motto.

5. Blogger Jesse Livermore writes, “My main life lesson from investing: self-interest is the most powerful force on earth, and can get people to embrace and defend almost anything.”

6. As Erik Falkenstein says: “In expert tennis, 80% of the points are won, while in amateur tennis, 80% are lost. The same is true for wrestling, chess, and investing: Beginners should focus on avoiding mistakes, experts on making great moves.”

7. There is a difference between, “He predicted the crash of 2008,” and “He predicted crashes, one of which happened to occur in 2008.” It’s important to know the difference when praising investors.

8. Investor Dean Williams once wrote, “Confidence in a forecast rises with the amount of information that goes into it. But the accuracy of the forecast stays the same.”

9. Wealth is relative. As comedian Chris Rock said, “If Bill Gates woke up with Oprah’s money he’d jump out the window.”

10. Only 7% of Americans know stocks rose 32% last year, according to Gallup. One-third believe the market either fell or stayed the same. Everyone is aware when markets fall; bull markets can go unnoticed.

11. Dean Williams once noted that “Expertise is great, but it has a bad side effect: It tends to create the inability to accept new ideas.” Some of the world’s best investors have no formal backgrounds in finance — which helps them tremendously.

12. The Financial Times wrote, “In 2008 the three most admired personalities in sport were probably Tiger Woods, Lance Armstrong and Oscar Pistorius.” The same falls from grace happen in investing. Chose your role models carefully.

13. Investor Ralph Wagoner once explained how markets work, recalled by Bill Bernstein: “He likens the market to an excitable dog on a very long leash in New York City, darting randomly in every direction. The dog’s owner is walking from Columbus Circle, through Central Park, to the Metropolitan Museum. At any one moment, there is no predicting which way the pooch will lurch. But in the long run, you know he’s heading northeast at an average speed of three miles per hour. What is astonishing is that almost all of the market players, big and small, seem to have their eye on the dog, and not the owner.”

14. Investor Nick Murray once said, “Timing the market is a fool’s game, whereas time in the market is your greatest natural advantage.” Remember this the next time you’re compelled to cash out.

15. Bill Seidman once said, “You never know what the American public is going to do, but you know that they will do it all at once.” Change is as rapid as it is unpredictable.

16. Napoleon’s definition of a military genius was, “the man who can do the average thing when all those around him are going crazy.” Same goes in investing.

17. Blogger Jesse Livermore writes,”Most people, whether bull or bear, when they are right, are right for the wrong reason, in my opinion.”

18. Investors anchor to the idea that a fair price for a stock must be more than they paid for it. It’s one of the most common, and dangerous, biases that exists. “People do not get what they want or what they expect from the markets; they get what they deserve,” writes Bill Bonner.

19. Jason Zweig writes, “The advice that sounds the best in the short run is always the most dangerous in the long run.”

20. Billionaire investor Ray Dalio once said, “The more you think you know, the more closed-minded you’ll be.” Repeat this line to yourself the next time you’re certain of something.

21. During recessions, elections, and Federal Reserve policy meetings, people become unshakably certain about things they know very little about.

22. “Buy and hold only works if you do both when markets crash. It’s much easier to both buy and hold when markets are rising,” says Ben Carlson.

23. Several studies have shown that people prefer a pundit who is confident to one who is accurate. Pundits are happy to oblige.

24. According to J.P. Morgan, 40% of stocks have suffered “catastrophic losses” since 1980, meaning they fell at least 70% and never recovered.

25. John Reed once wrote, “When you first start to study a field, it seems like you have to memorize a zillion things. You don’t. What you need is to identify the core principles — generally three to twelve of them — that govern the field. The million things you thought you had to memorize are simply various combinations of the core principles.” Keep that in mind when getting frustrated over complicated financial formulas.

26. James Grant says, “Successful investing is about having people agree with you … later.”

27. Scott Adams writes, “A person with a flexible schedule and average resources will be happier than a rich person who has everything except a flexible schedule. Step one in your search for happiness is to continually work toward having control of your schedule.”

28. According to Vanguard, 72% of mutual funds benchmarked to the S&P 500 underperformed the index over a 20-year period ending in 2010. The phrase “professional investor” is a loose one.

29. “If your investment horizon is long enough and your position sizing is appropriate, you simply don’t argue with idiocy, you bet against it,” writes Bruce Chadwick.

30. The phrase “double-dip recession” was mentioned 10.8 million times in 2010 and 2011, according to Google. It never came. There were virtually no mentions of “financial collapse” in 2006 and 2007. It did come. A similar story can be told virtually every year.

31. According to Bloomberg, the 50 stocks in the S&P 500 that Wall Street rated the lowest at the end of 2011 outperformed the overall index by 7 percentage points over the following year.

32. “The big money is not in the buying or the selling, but in the sitting,” said Jesse Livermore.

33. Investors want to believe in someone. Forecasters want to earn a living. One of those groups is going to be disappointed. I think you know which.

34. In a poll of 1,000 American adults, asked, “How many millions are in a trillion?” 79% gave an incorrect answer or didn’t know. Keep this in mind when debating large financial problems.

35. As last year’s Berkshire Hathaway shareholder meeting, Warren Buffett said he has owned 400 to 500 stocks during his career, and made most of his money on 10 of them. This is common: a large portion of investing success often comes from a tiny proportion of investments.

36. Wall Street consistently expects earnings to beat expectations. It also loves oxymorons.

37. The S&P 500 gained 27% in 2009 — a phenomenal year. Yet 66% of investors thought it fell that year, according to a survey by Franklin Templeton. Perception and reality can be miles apart.

38. As Nate Silver writes, “When a possibility is unfamiliar to us, we do not even think about it.” The biggest risk is always something that no one is talking about, thinking about, or preparing for. That’s what makes it risky.

39. The next recession is never like the last one.

40. Since 1871, the market has spent 40% of all years either rising or falling more than 20%. Roaring booms and crushing busts are perfectly normal.

41. As the saying goes, “Save a little bit of money each month, and at the end of the year you’ll be surprised at how little you still have.”

42. John Maynard Keynes once wrote, “It is safer to be a speculator than an investor in the sense that a speculator is one who runs risks of which he is aware and an investor is one who runs risks of which he is unaware.”

43. “History doesn’t crawl; it leaps,” writes Nassim Taleb. Events that change the world — presidential assassinations, terrorist attacks, medical breakthroughs, bankruptcies — can happen overnight.

44. Our memories of financial history seem to extend about a decade back. “Time heals all wounds,” the saying goes. It also erases many important lessons.

45. You are under no obligation to read or watch financial news. If you do, you are under no obligation to take any of it seriously.

46. The most boring companies — toothpaste, food, bolts — can make some of the best long-term investments. The most innovative, some of the worst.

47. In a 2011 Gallup poll, 34% of Americans said gold was the best long-term investment, while 17% said stocks. Since then, stocks are up 87%, gold is down 35%.

48. According to economist Burton Malkiel, 57 equity mutual funds underperformed the S&P 500 from 1970 to 2012. The shocking part of that statistic is that 57 funds could stay in business for four decades while posting poor returns. Hope often triumphs over reality.

49. Most economic news that we think is important doesn’t matter in the long run. Derek Thompson of The Atlantic once wrote, “I’ve written hundreds of articles about the economy in the last two years. But I think I can reduce those thousands of words to one sentence. Things got better, slowly.”

50. A broad index of U.S. stocks increased 2,000-fold between 1928 and 2013, but lost at least 20% of its value 20 times during that period. People would be less scared of volatility if they knew how common it was.

51. The “evidence is unequivocal,” Daniel Kahneman writes, “there’s a great deal more luck than skill in people getting very rich.”

52. There is a strong correlation between knowledge and humility. The best investors realize how little they know.

53. Not a single person in the world knows what the market will do in the short run.

54. Most people would be better off if they stopped obsessing about Congress, the Federal Reserve, and the president, and focused on their own financial mismanagement.

55. In hindsight, everyone saw the financial crisis coming. In reality, it was a fringe view before mid-2007. The next crisis will be the same (they all work like that).

56. There were 272 automobile companies in 1909. Through consolidation and failure, three emerged on top, two of which went bankrupt. Spotting a promising trend and a winning investment are two different things.

57. The more someone is on TV, the less likely his or her predictions are to come true. (University of California, Berkeley psychologist Phil Tetlock has data on this).

58. Maggie Mahar once wrote that “men resist randomness, markets resist prophecy.” Those six words explain most people’s bad experiences in the stock market.

59. “We’re all just guessing, but some of us have fancier math,” writes Josh Brown.

60. When you think you have a great idea, go out of your way to talk with someone who disagrees with it. At worst, you continue to disagree with them. More often, you’ll gain valuable perspective. Fight confirmation bias like the plague.

61. In 1923, nine of the most successful U.S. businessmen met in Chicago. Josh Brown writes:

Within 25 years, all of these great men had met a horrific end to their careers or their lives:

The president of the largest steel company, Charles Schwab, died a bankrupt man; the president of the largest utility company, Samuel Insull, died penniless; the president of the largest gas company, Howard Hobson, suffered a mental breakdown, ending up in an insane asylum; the president of the New York Stock Exchange, Richard Whitney, had just been released from prison; the bank president, Leon Fraser, had taken his own life; the wheat speculator, Arthur Cutten, died penniless; the head of the world’s greatest monopoly, Ivar Krueger the ‘match king’ also had taken his life; and the member of President Harding’s cabinet, Albert Fall, had just been given a pardon from prison so that he could die at home.

62. Try to learn as many investing mistakes as possible vicariously through others. Other people have made every mistake in the book. You can learn more from studying the investing failures than the investing greats.

63. Bill Bonner says there are two ways to think about what money buys. There’s the standard of living, which can be measured in dollars, and there’s the quality of your life, which can’t be measured at all.

64. If you’re going to try to predict the future — whether it’s where the market is heading, or what the economy is going to do, or whether you’ll be promoted — think in terms of probabilities, not certainties. Death and taxes, as they say, are the only exceptions to this rule.

65. Focus on not getting beat by the market before you think about trying to beat it.

66. Polls show Americans for the last 25 years have said the economy is in a state of decline. Pessimism in the face of advancement is the norm.

67. Finance would be better if it was taught by the psychology and history departments at universities.

68. According to economist Tim Duy, “As long as people have babies, capital depreciates, technology evolves, and tastes and preferences change, there is a powerful underlying impetus for growth that is almost certain to reveal itself in any reasonably well-managed economy.”

69. Study successful investors, and you’ll notice a common denominator: they are masters of psychology. They can’t control the market, but they have complete control over the gray matter between their ears.

70. In finance textbooks, “risk” is defined as short-term volatility. In the real world, risk is earning low returns, which is often caused by trying to avoid short-term volatility.

71. Remember what Nassim Taleb says about randomness in markets: “If you roll dice, you know that the odds are one in six that the dice will come up on a particular side. So you can calculate the risk. But, in the stock market, such computations are bull — you don’t even know how many sides the dice have!”

72. The S&P 500 gained 27% in 1998. But just five stocks — Dell, Lucent, Microsoft, Pfizer, and Wal-Mart — accounted for more than half the gain. There can be huge concentration even in a diverse portfolio.

73. The odds that at least one well-known company is insolvent and hiding behind fraudulent accounting are pretty high.

74. The book Where Are the Customers’ Yachts? was written in 1940, and most people still haven’t figured out that brokers don’t have their best interest at heart.

75. Cognitive psychologists have a theory called “backfiring.” When presented with information that goes against your viewpoints, you not only reject challengers, but double down on your view. Voters often view the candidate they support more favorably after the candidate is attacked by the other party. In investing, shareholders of companies facing heavy criticism often become die-hard supporters for reasons totally unrelated to the company’s performance.

76. “In the financial world, good ideas become bad ideas through a competitive process of ‘can you top this?'” Jim Grant once said. A smart investment leveraged up with debt becomes a bad investment very quickly.

77. Remember what Wharton professor Jeremy Siegel says: “You have never lost money in stocks over any 20-year period, but you have wiped out half your portfolio in bonds [after inflation]. So which is the riskier asset?”

78. Warren Buffett’s best returns were achieved when markets were much less competitive. It’s doubtful anyone will ever match his 50-year record.

79. Twenty-five hedge fund managers took home $21.2 billion in 2013 for delivering an average performance of 9.1%, versus the 32.4% you could have made in an index fund. It’s a great business to work in — not so much to invest in.

80. The United States is the only major economy in which the working-age population is growing at a reasonable rate. This might be the most important economic variable of the next half-century.

81. Most investors have no idea how they actually perform. Markus Glaser and Martin Weber of the University of Mannheim asked investors how they thought they did in the market, and then looked at their brokerage statements. “The correlation between self ratings and actual performance is not distinguishable from zero,” they concluded.

82. Harvard professor and former Treasury Secretary Larry Summers says that “virtually everything I taught” in economics was called into question by the financial crisis.

83. Asked about the economy’s performance after the financial crisis, Charlie Munger said, “If you’re not confused, I don’t think you understand.”

84. There is virtually no correlation between what the economy is doing and stock market returns. According to Vanguard, rainfall is actually a better predictor of future stock returns than GDP growth. (Both explain slightly more than nothing.)

85. You can control your portfolio allocation, your own education, who you listen to, what you read, what evidence you pay attention to, and how you respond to certain events. You cannot control what the Fed does, laws Congress sets, the next jobs report, or whether a company will beat earnings estimates. Focus on the former; try to ignore the latter.

86. Companies that focus on their stock price will eventually lose their customers. Companies that focus on their customers will eventually boost their stock price. This is simple, but forgotten by countless managers.

87. Investment bank Dresdner Kleinwort looked at analysts’ predictions of interest rates, and compared that with what interest rates actually did in hindsight. It found an almost perfect lag. “Analysts are terribly good at telling us what has just happened but of little use in telling us what is going to happen in the future,” the bank wrote. It’s common to confuse the rearview mirror for the windshield.

88. Success is a lousy teacher,” Bill Gates once said. “It seduces smart people into thinking they can’t lose.”

89. Investor Seth Klarman says, “Macro worries are like sports talk radio. Everyone has a good opinion which probably means that none of them are good.”

90. Several academic studies have shown that those who trade the most earn the lowest returns. Remember Pascal’s wisdom: “All man’s miseries derive from not being able to sit in a quiet room alone.”

91. The best company in the world run by the smartest management can be a terrible investment if purchased at the wrong price.

92. There will be seven to 10 recessions over the next 50 years. Don’t act surprised when they come.

93. No investment points are awarded for difficulty or complexity. Simple strategies can lead to outstanding returns.

94. The president has much less influence over the economy than people think.

95. However much money you think you’ll need for retirement, double it. Now you’re closer to reality.

96. For many, a house is a large liability masquerading as a safe asset.

97. The single best three-year period to own stocks was during the Great Depression. Not far behind was the three-year period starting in 2009, when the economy struggled in utter ruin. The biggest returns begin when most people think the biggest losses are inevitable.

98. Remember what Buffett says about progress: “First come the innovators, then come the imitators, then come the idiots.”

99. And what Mark Twain says about truth: “A lie can travel halfway around the world while truth is putting on its shoes.”

100. And what Marty Whitman says about information: “Rarely do more than three or four variables really count. Everything else is noise.”

101. Among Americans aged 18 to 64, the average number of doctor visits decreased from 4.8 in 2001 to 3.9 in 2010. This is partly because of the weak economy, and partly because of the growing cost of medicine, but it has an important takeaway: You can never extrapolate behavior — even for something as vital as seeing a doctor — indefinitely. Behaviors change.

102. Since last July, elderly Chinese can sue their children who don’t visit often enough, according to Bloomberg. Dealing with an aging population calls for drastic measures.

103. Someone once asked Warren Buffett how to become a better investor. He pointed to a stack of annual reports. “Read 500 pages like this every day,” he said. “That’s how knowledge works. It builds up, like compound interest. All of you can do it, but I guarantee not many of you will do it.”

104. If Americans had as many babies from 2007 to 2014 as they did from 2000 to 2007, there would be 2.3 million more kids today. That will affect the economy for decades to come.

105. The Congressional Budget Office’s 2003 prediction of federal debt in the year 2013 was off by $10 trillion. Forecasting is hard. But we still line up for it.

106. According to The Wall Street Journal, in 2010, “for every 1% decrease in shareholder return, the average CEO was paid 0.02% more.”

107. Since 1994, stock market returns are flat if the three days before the Federal Reserve announces interest rate policy are removed, according to a study by the Federal Reserve.

108. In 1989, the CEOs of the seven largest U.S. banks earned an average of 100 times what a typical household made. By 2007, more than 500 times. By 2008, several of those banks no longer existed.

109. Two things make an economy grow: population growth and productivity growth. Everything else is a function of one of those two drivers.

110. The single most important investment question you need to ask yourself is, “How long am I investing for?” How you answer it can change your perspective on everything.

111. “Do nothing” are the two most powerful — and underused — words in investing. The urge to act has transferred an inconceivable amount of wealth from investors to brokers.

112. Apple increased more than 6,000% from 2002 to 2012, but declined on 48% of all trading days. It is never a straight path up.

113. It’s easy to mistake luck for success. J. Paul Getty said, the key to success is: 1) rise early, 2) work hard, 3) strike oil.

114. Dan Gardner writes, “No one can foresee the consequences of trivia and accident, and for that reason alone, the future will forever be filled with surprises.”

115. I once asked Daniel Kahneman about a key to making better decisions. “You should talk to people who disagree with you and you should talk to people who are not in the same emotional situation you are,” he said. Try this before making your next investment decision.

116. No one on the Forbes 400 list of richest Americans can be described as a “perma-bear.” A natural sense of optimism not only healthy, but vital.

117. Economist Alfred Cowles dug through forecasts a popular analyst who “had gained a reputation for successful forecasting” made in The Wall Street Journal in the early 1900s. Among 90 predictions made over a 30-year period, exactly 45 were right and 45 were wrong. This is more common than you think.

118. Since 1900, the S&P 500 has returned about 6.5% per year, but the average difference between any year’s highest close and lowest close is 23%. Remember this the next time someone tries to explain why the market is up or down by a few percentage points. They are basically trying to explain why summer came after spring.

119. How long you stay invested for will likely be the single most important factor determining how well you do at investing.

120. A money manager’s amount of experience doesn’t tell you much. You can underperform the market for an entire career. Many have.

121. A hedge fund once described its edge by stating, “We don’t own one Apple share. Every hedge fund owns Apple.” This type of simple, contrarian thinking is worth its weight in gold in investing.

122. Take two investors. One is an MIT rocket scientist who aced his SATs and can recite pi out to 50 decimal places. He trades several times a week, tapping his intellect in an attempt to outsmart the market by jumping in and out when he’s determined it’s right. The other is a country bumpkin who didn’t attend college. He saves and invests every month in a low-cost index fund come hell or high water. He doesn’t care about beating the market. He just wants it to be his faithful companion. Who’s going to do better in the long run? I’d bet on the latter all day long. “Investing is not a game where the guy with the 160 IQ beats the guy with a 130 IQ,” Warren Buffett says. Successful investors know their limitations, keep cool, and act with discipline. You can’t measure that.

For more:

Check back every Tuesday and Friday for Morgan Housel’s columns.

More from The Motley Fool: Our retirement experts explain a straightforward way to increase retirement income.

MONEY exchange-traded funds

Why Index Funds Are Like Cheap TVs at Walmart

"Why are you window shopping?" Sale inside sign on store window
jaminwell—Getty Images

You can get a great deal on exchange-traded funds tracking large stock indexes. But watch out for the extra spending that can pile up.

Every industry has its loss leaders, and the investment world is no different. The theory is that you will go to the store for the $12 turkey and stick around to buy dressing, cranberries, juice, pies and two kinds of potatoes.

In the investment world, the role of the cheap turkey is played by broad stock index exchange traded funds. While investment firms say they make money on even low-fee funds, their profit margins on these products have been narrowing.

There’s been a bidding war among issuers of exchange traded funds that mimic large stock indexes like the Standard & Poor’s 500 or the Wilshire 5000 stock index. Companies including Blackrock, Vanguard, and Charles Schwab have been competing to offer investors the lowest cost shares possible on these products. Right now, Schwab — which will begin offering pre-mixed portfolios of ultra-low-cost ETFs early in 2015 — is winning.

Their theory? You’ll come in the door for the index ETF and stay for the more expensive funds, the alternative investments, the retirement advice.

“We believe we will keep that client for a long time,” said John Sturiale, senior vice president of product management for Charles Schwab Investment Management.

Investors, of course, are free to come in and buy the cheap TV and nothing more. Here are some points to consider if you want to squeeze the most out of low-cost exchange traded funds.

A few points don’t matter, but a lot of points do.

“Over the long term, cost is one of the biggest determinants of portfolio performance,” said Michael Rawson, a Morningstar analyst.

If you have a TD Ameritrade brokerage account, you can buy the Vanguard Total Stock Market Index Fund ETF for no cost beyond annual expenses of 0.05% of your assets in the fund. At Schwab, you can buy the Schwab U.S. Broad Market ETF for an annual expense of 0.04%. That 0.01 percentage point difference is negligible.

But compare that low-cost index fund with an actively managed fund carrying 1.3% in expenses. Invest $50,000 at the long-term stock market average return of 10% and you’ll end up with $859,477 after 30 years of having that 0.05% deducted annually. Pay 1.3% a year in expenses instead (not unusual for a high-profile actively managed mutual fund) and you’ll end up with $589,203. You’ll have given up $270,274 in fees, according to calculations performed at Buyupside.com.

Don’t pay for advice you don’t need.

The latest trend in investment advice is to charge clients roughly 1% of all of their assets to come up with a broad and diversified portfolio — with index funds at their core. Why not just buy your own core of index funds and exchange traded funds directly, and then get advice on the trickier parts of your portfolio? Or pay an adviser a onetime fee to develop a mostly index portfolio that you can buy on your own?

You won’t give up performance.

High-priced actively managed large stock funds as a group do not typically beat their indexes over time. Even those star managers who do outperform almost never do so year after year after year.

Build a broad portfolio.

Not every category of investment lends itself to low-cost indexing. You may do better with a seasoned stock picker if you’re taking aim at small-growth stocks, for example. But you can make the core of your plan a diversified and cheap portfolio of ETFs at any of the aforementioned companies, and save your fees for those extras that will really add value — the gravy, if you will.

MONEY Ask the Expert

If You Only Have One Investment, This Is the One You Need

Investing illustration
Robert A. Di Ieso, Jr.

Q: Which is a better long-term investment — a Nasdaq index fund or an index fund that tracks the Standard & Poor’s 500? — James

A: A Nasdaq fund could “play a supporting role in a diversified portfolio,” says Leslie Thompson, a financial adviser and principal at Spectrum Management Group in Indianapolis. But if you’re going to pick just one index fund for the core part of your portfolio, you’re better off buying a mutual fund or exchange-traded fund that tracks the Standard & Poor’s 500,” she says.

Why?

Before getting into the details, let’s start with the basics.

Rather than picking and choosing “the best” securities to own, index fund simply buy and hold all the securities in a given market. By avoiding the stock selection process, index funds give you broad-based market exposure while being able to charge low expenses, which is a good thing.

The downside of this approach, of course, is that you won’t ever “beat the market” or finish at the top using this strategy. In fact, by owning all the stocks in a market, you will by definition get average market returns. However, this also means you will never badly lag the market either.

If you opt for this strategy, the market you choose to index is a critical decision.

The S&P 500 is considered the broadest of the best-known U.S. stock indexes.

The S&P 500 tracks the 500 largest, most liquid stocks listed on the New York Stock Exchange and the Nasdaq — and across a spectrum of industries. “For a long-term core holding, the S&P 500 better represents the economic environment providing more diversified exposures to all sectors of the U.S.,” Thompson says.

By contrast, the most popular Nasdaq index, the Nasdaq 100, tracks about 100 of the largest non-financial companies that are listed on the Nasdaq. It’s considerably less diverse, with technology companies accounting for about 60% of its weighting, says Thompson. It’s also extremely top heavy. “Just two companies, Apple and Microsoft, make up 23% of the index,” says Thompson. The top 10 stocks, meanwhile, account for about half of the entire index versus less than 20% for the S&P 500.

This tech focus hasn’t been such a bad thing over the last decade, when it comes to performance. The USAA Nasdaq Index 100 mutual fund is up an average of 10.6% a year over the last 10 years, nearly three percentage points a year more than the Vanguard 500 Index fund.

The tradeoff: potentially more volatility.

You’ll recall that when the dot.com bubble burst in 2000, Nasdaq stocks took a much bigger hit than the S&P 500. The downside for the Nasdaq 100 hasn’t been as extreme over the last decade, says Thompson, but this isn’t the norm. Keep in mind too that the Nasdaq composite index has yet to surpass its all-time peak of more than 5,000 which it reached in 2000.

The index’s strong performance of late, moreover, has been the result of outsize results from just a handful of companies. (You can probably guess which ones.) If and when these stocks tumble, so too will the index.

 

MONEY 401(k)s

The Big Flaws in Your 401(k), and How to Fix Them

Falling Short book cover

Badly designed 401(k) plans are a key reason Americans are headed towards a retirement crisis, a new book explains. Here are three moves that can help.

Every week seems to bring a new study with more scary data about the Americans’ looming retirement crisis—and it’s all too easy to tune out. Don’t. As a sobering new book, Falling Short, explains, the crisis is real and getting worse. And if you want to preserve your chances of a comfortable retirement, it’s time to take action.

One of the most critical problems is the flawed 401(k) plan, which is failing workers just as they need more help than ever. “The dream of the 401(k) has not matched the reality,” says co-author Charles Ellis. “It’s turned out to be a bad idea to ask people to become investing experts—most aren’t, and they don’t want to be.”

When it comes to money management, Ellis has plenty of perspective on what works and what doesn’t. Now 77, he wrote the investing classic Winning the Loser’s Game and founded the well-known financial consulting firm Greenwich Associates. His co-authors are Alicia Munnell, a prominent retirement expert who heads the Center for Retirement Research at Boston College, and Andrew Eschtruth, the center’s associate director.

What’s wrong with the 401(k)? For basic behavioral reasons, workers consistently fail to take full advantage of their plans. Most enroll, or are auto-enrolled, at a low initial savings rate, often just 3% of pay— and they stay at that level, since few plans automatically increase workers’ contributions. Many employees borrow money from their plans, or simply cash out when they change jobs, which further erodes their retirement security. Even if investors are up to the task of money management, their 401(k)s may hamper their efforts. Many plans have limited investing menus, few index funds, and all too often saddle workers with high costs.

When you add it up, investor mismanagement, along with 401(k) design and implementation flaws, have cost Americans a big chunk of their retirement savings, according to a recent Center for Retirement Research study. Among working households headed by a 55- to 64-year-old, the median retirement savings—both 401(k)s and IRAs—is just $100,000. By contrast, if 401(k)s worked well, the median amount would have been $373,000, or $273,000 more. As things stand now, half of Americans are at risk of not being able to maintain their standard of living in retirement, according to the center’s research.

Can the 401(k) be fixed? Yes, the authors say, if employers adopt reforms such as auto enrollment, a higher automatic contribution rate, and the use of low-cost index funds. But even those changes won’t end the retirement crisis—after all, only half of private sector workers have an employer-sponsored retirement plan. Moreover, Americans face other economic challenges, including funding Social Security, increased longevity, and rising health care costs.

To address these problems, authors discuss possible policy changes, such as automatic IRAs for small businesses and proposals for a new national retirement plan. Still, major reforms are unlikely to happen soon. Meanwhile, there’s a lot you can do now to improve your odds of a comfortable retirement. The authors highlight these three moves to get you started:

Aim to save 14%: The best way to ensure that you actually save is to make the process automatic. That’s why few people consistently put away money without help from a company retirement plan. If you save 14% of your income each year, starting at age 35, you can expect to retire comfortably at age 67, the authors’ research shows. Start saving at age 25, and put away 12%, and you may be able to retire at 65. If you get a 401(k) matching contribution, that can help your reach your goal.

Choose low-cost index funds. One of the smartest ways to pump up your savings is to lower your investment fees—after all, each dollar you pay in costs reduces your return. Opt for index funds and ETFs, which typically charge just 0.2% or less. By contrast, actively managed stock funds often cost 1.4% or more, and odds are, they will lag their benchmarks.

Adjust your goals to match reality. You 401(k) account isn’t something you can set and forget. Make sure you’re saving enough, and that your investments still match your risk tolerance and goals—a lot can change in your life over two or more decades. The good news is that you can find plenty of free online calculators, both inside and outside your plan, to help you stay on course.

If you’re behind in your savings, consider working a few years longer if you can. By delaying retirement, you give yourself the opportunity to save more, and your portfolio has more time to grow. Just as important, each year that you defer your Social Security claim between the ages of 62 and 70 will boost the size of your benefit by 8% a year. “You get 76% more at age 70 than you will at age 62,” says Ellis. If working till 70 isn’t your idea of an dream retirement, then you have plenty of incentive to save even more now.

More on 401(k)s:
Why Millennials are flocking to 401(k)s in record numbers
Why your 401(k) may only return 4%
This Nobel economist nails what’s really wrong with your 401(k)

MONEY Markets

Here’s How Anyone Can Beat Professional Investors

141110_INV_PassiveInvesting
With cheap index funds, you can diversify without paying a premium. Herbert Gehr—Getty Images/Time & Life Picture

Statistically speaking, financial experts still can't match the "wisdom of the crowd."

Another day, another piece of evidence that active fund managers are no better at investing than lab rats.

This time, researchers at Bank of America found that more than 4 out of 5 managers have failed to beat the Russell 1000 index of large-company stocks so far this year. In fact, there’s been only one year in the last decade (2007) when a majority of active managers beat the market.

“It’s an incredibly competitive environment, with so many active managers looking for the next great investment, and it’s just not there,” says Alexander Dyck, a finance professor at University of Toronto’s Rotman School of Management, who has co-authored an international comparison of active and passive strategies.

Dyck’s research found that in the United States, passive strategies work better than active management. That is, mutual funds that simply mimic an index actually return more money, post-fees, than funds managed by professionals making hands-on choices about what stocks, bonds, and other assets to hold.

That finding is a big deal because people who invest in active funds—say, in their 401(k)s or other retirement accounts—typically pay much higher fees than those who invest in passive funds. Thanks to active management, stock fund investors on average end up paying more than five times as much in expenses than they would with index funds; that can amount to tens of thousands of dollars, as the chart below shows.

Screen Shot 2014-11-11 at 4.54.47 PM (2)
Source: https://personal.vanguard.com/us/insights/investingtruths/investing-truth-about-cost

When active funds do beat their benchmarks, that can make up for high fees (though evidence suggests even that scenario is rare). But with most returns so uninspiring, there doesn’t seem to be much remaining justification for active management, at least for the average investor. Better to stick with cheap index funds.

Of course, there are exceptions to this rule. Dyck’s research, for example, found that active managers can still beat their benchmarks when they invest overseas—particularly in emerging markets like China, where investing in companies hand-picked by a professional tends to be a better bet than investing in a basket of stocks representing every company out there.

“In countries with significant governance risks, a plain old index gives you exposure to everything, including the good, the bad, and the ugly,” says Dyck.

But even though active investing outside of the U.S. seems to work for institutional investors who generally pay lower fees, Dyck says, it doesn’t mean it’ll be worth it for you. As a retail investor, you’ll almost always pay more than the professionals.

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.

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