MONEY index funds

Donald Trump Would Be Billions Richer If He’d Invested in Index Funds

Republican candidate for US President Donald Trump
Getty Images Donald Trump speaks to media at a press conference before a town hall meeting in Derry, New Hampshire on Wednesday, August 19, 2015.

The Republican presidential candidate could be worth $13 billion today if he'd played his cards right.

Trump’s net worth has grown about 300% to an estimated $4 billion since 1987, according to a report by the Associated Press. But the real estate mogul would have made even more money if he had just invested in index funds. The AP says that, if Trump had invested in an index fund in 1988, his net worth would be as much as $13 billion.

The S&P 500 has grown 1,336% since 1988.

Other billionaires’ net worths have beaten the stock market’s growth in that time. Bill Gates, for example, saw his grow increase 7,173% since 1988 to $80 billion. Warren Buffet’s wealth grew 2,612% in the same time period, to $67.8 billion.

Another recent Associated Press report found that Trump is a much more cautious businessman than he lets on. “He holds few stocks for someone of his wealth and has grown increasingly dependent on making money by lending out his name to others rather than developing real estate himself,” the AP wrote.

This article originally appeared in Fortune.

MONEY strategy

The Top 3 Reasons Never to Chase Investment Returns

BraunS—Getty Images

#1: The past is too late.

You hear advisors on TV talking about how they research and pick the securities with the highest returns. That sounds good since who doesn’t want the best? Why not jump in and catch the wave? Here are three reasons why not.

1. The past is too late. Those returns did happen, but the investment isn’t already in your portfolio. Regardless of how good they were, you don’t get the past returns of the investments you weren’t in.

If you take an old investment out and put a new investment into the portfolio after you notice it had better return, you get the returns of the lower performing investment. So you see the shell game? Switching out a lower performing investment gives you an illusion that your returns improve.

2. The future is unpredictable. Past performance does not guarantee future returns. You see this in every disclosure. Yet many still have the misperception that they can look at past returns to determine the future return of that investment.

Numerous studies have found that funds that did well in the past do not consistently go on to do so. The Standard & Poor’s ongoing reports on funds performance show that managers don’t year after year outperform the indexes.

I agree with advisor Daniel Solin’s article that we need a stronger disclaimer to better remind investors of this fact. A study he cites found that a more effective disclaimer would be: “Do not expect the fund’s quoted past performance to continue in the future. Studies show that mutual funds that have outperformed their peers in the past generally do not outperform them in the future. Strong past performance is often a matter of chance.”

3. Outperforming is not your goal. The real objective of investing is achieving your life goals, such as a sustainable retirement. That has more to do with your savings and spending rates that it does with returns. And unlike the returns the markets deliver, you can control how much you save or spend.

So how should you invest? Rather than chasing returns, simply invest in broad indexes and get what the markets give you – good and bad. This approach allows you to dial in the level of risk. You don’t get the occasional outperformance, but you also don’t underperform, either. Unless there are systematic risks – when the economy tanks, like it did in 2008 – you get consistent returns that match the markets.

One can wish for good returns all the time. But that is not how the markets work. Unexpected news and all participants’ expectations and reactions to it move prices. Your part is to let the markets work over time.

Larry R. Frank Sr., CFP, is a Registered Investment Advisor (California) in Roseville, Calif. He is the author of the book, Wealth Odyssey. He has an MBA with a finance concentration and B.S. cum laude in physics with which he views the world of money dynamically. He has peer-reviewed research published in the Journal of Financial Planning.

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MONEY stocks

Jack Bogle Explains How the Index Fund Won With Investors

A Q&A with Vanguard Group founder Jack Bogle, the creator of the first retail index fund.

Mutual fund managers who pick stocks haven’t had much to show for their efforts (or their fees) in recent years. An investor would likely have made more money over the past decade by picking a low-cost index fund that mirrors the market as a whole. In 1976, John C. Bogle launched the first such fund for retail investors, Vanguard 500. This edited interview originally appeared in the August 2015 issue of MONEY magazine.

Q: Has the index fund won?
A: It certainly has. Vanguard has the largest share of fund assets—almost 20%—in the industry. Two-thirds of that is index funds.

But index funds had a fabulous year last year. [Vanguard’s flagship Total Stock Market Index Fund earned 12.4%, vs. an average of 7.8% for domestic stock funds.] It’s not going to happen again, maybe ever, so basically we got overly praised. You shouldn’t buy an index fund because you think it’s a hot performer. Buy it because you’re going to hold it forever.

Screen Shot 2015-07-24 at 3.15.30 PM


Look, all I did with the index fund was make sure you got your fair share of the market’s return. Sometimes that fair share is going to be bad, so you’re going to lose money. And that’s a great marketing message—candor as a marketing strategy. And it’s paid off. People hawking a particular fund have no idea how long it will continue to do well. They’ll say, “Our fund went up 500% in the last 10 years, and the index fund only went up 320%, so indexes are overrated.” That’s usually the end for that fund.

Q: Vanguard’s no longer the only big player in indexing. What’s the difference between buying a Vanguard fund and an index-based exchange-traded fund from, say, iShares?
A: The ETF is a different breed of cat. There are really two ETF businesses. One is huge and involves enormous amounts of trading. Then there’s the much smaller market of individual investors who aren’t trading all day long. They could just as easily be in the traditional mutual fund. [Vanguard sells its index funds in both ETF and traditional form.]

Q: So ETFs have short-term money in them. What’s wrong with that?
A: Investors will lose. It used to be you could get your money out of a fund at the close of a business day. Now you can trade in and out of the S&P 500 all day in real time. Don’t ask me what kind of a nut would want to do that. It works against investors because if you have a big collapse in the market, and you get out at noon, the odds are pretty good the market will be up by the close. In the long run, trading is just a big distraction. Warren Buffett believes this. He said that 90% of the trust he’s leaving to his wife should go in the Vanguard 500 Index Fund.

Q: If he’d asked, would you have suggested the more diverse Vanguard Total Stock Market Fund instead?
A: Yeah! I wrote him about that. I didn’t hear back from him. An even more interesting question is why he doesn’t use international. Everybody’s talking about how you have to have international, but I don’t know why.

Q: Why not? More than half of the stocks you could buy, by market capitalization, are outside the U.S.
A: In the long run, market returns are created by business returns. And I think American business and the American economy are going to be the strongest in the world. I think we have more innovation. I think we have better technology. And I know we have a better legal structure, better shareholder protections. Some foreign nations are fine, but not all.

I’ve said if you want to hold non-U.S. stocks, go to 20%. Now people are saying 40%. You know, if you go from 20% to 40%, and foreign stocks out-perform by two percentage points per year—which would be astonishing—that’s a 0.40 percentage point benefit. So my own view is it’s not worth it.

Q: What about the benefits of diversification or the idea that going abroad can lower overall risk because markets aren’t correlated?
A: Diversification is certainly true, but noncorrelation is bunk. It’s applying higher mathematics to something I don’t think requires it. We’ve overanalyzed the whole thing. I’m always the apostle of simplicity and lower costs.

Q: Since 2000, fees charged by mutual funds have been coming down. Have you won that argument too?
A: Forty or so of the 50 largest fund groups are owned by publicly traded companies. They are in business to earn a return on capital for that company’s investors, and that’s the great conflict. They become great big marketing companies. They hold the line on fees, conceding only where they have to or for PR purposes. The cost structure of the industry is insane—50% profit margins are not unknown.

Q: You set up Vanguard so that it’s owned by its own funds, which in turn are owned by fund investors. It seems to me that idea is as important to you as indexing.
A: The conflict of interest in the industry isn’t about indexing vs. active management. It’s cost. The point of the Vanguard structure is to eliminate the management company’s profit. Compare what investors pay at Vanguard to what they pay at a competitor, and we’re saving shareholders a total of $14 billion a year.

Q: What’s that mean, to cut out the profit? Vanguard keeps costs low, but people must certainly be making financial services industry salaries.
A: I never said we have low costs. I’ve said we have low expense ratios. That’s very different. If you multiply Vanguard’s average 0.14% expense ratio by its $3 trillion in assets, that’s total expenses of about $4 billion. Go back to when we had about $1 trillion in assets, charging 0.21%—that’s about $2 billion. So Vanguard’s costs have gone from $2 billion to $4 billion. When you have 20 million shareholder accounts, it costs money. When you’re employing 15,000 people all over the world, it costs money. We don’t disclose executive compensation anymore, which I think is a little strange. [Bogle stepped down as Vanguard’s senior chairman in 1999.] I designed the best company that I could design. But there are ways to make it better.

Q: What are some things you would have done differently?
A: I would have made it mandatory that we continue to disclose executive compensation. And maybe make the company’s financial statements more broadly available. I think openness is important if you’re a company like Vanguard because these people own not only your funds but the management company too. They’re entitled to any information they want. If it’s painful to disclose, well, that’s too bad.

Q: Okay, index funds win, but I still have to decide how much to invest in stocks. Should I worry that stock prices look high?
A: For most investors, if you’re around the norm of 60% stocks and 40% bonds, I wouldn’t vary it much now. But based on today’s low stock dividend yields and bond yields, be prepared for a period of low returns compared to history.

Q: So then why bother with stocks?
A; Well, put your money in a money-market account, and you get 0.1%. You have to invest, but you can’t control the returns. And you should know that if you do stretch for higher returns, you’ll be taking on extra risk.

Q: One critic of indexing, money manager David Winters, says that because index funds own a stock no matter what, corporate boards have no incentive to rein in executive pay.
A: He just doesn’t know what he’s talking about. There is, as far as I can tell, no difference between the corporate governance activity of actively managed funds and index funds. They’re both very low. But think through the logic of it: The old Wall Street rule was, if you don’t like the management, sell the stock. In the case of an index fund, the rule has to be, if you don’t like the management, fix the management, because you can’t sell the stock. So I look at indexing as the great hope of governance.

Q: You’re concerned that the financial sector is too big. Why?
A; The job of finance is to provide capital to companies. We do it to the tune of $250 billion a year in IPOs and secondary offerings. What else do we do? We encourage investors to trade about $32 trillion a year. So the way I calculate it, 99% of what we do in this industry is people trading with one another, with a gain only to the middleman. It’s a waste of resources.

Q: What keeps you at this? Why are you sitting here talking to me instead of, I don’t know, looking at paintings in Venice?A: It’s a little bit that you carve out, probably inadvertently, the kind of person you are. And people expect you to be that kind of a person. Those kinds of expectations—Adam Smith called them “the invisible spectator”—shape what you do. And I guess I am just the type that likes to keep moving. I can’t imagine starting a day not knowing what I’m going to do.

Read next: Vanguard’s Founder Explains What Your Investment Adviser Should Do

MONEY mutual funds

Can You Beat the Vanguard 500 Index Fund?

John C. Bogle, founder of Vanguard and president of its Bogle Financial Markets Research Center, in his office at Vanguard’s headquarters in Malvern, Pennsylvania, Jan. 25, 2012.
Jessica Kourkounis—The New York Times/Redux Pictures John C. Bogle, founder of Vanguard and president of its Bogle Financial Markets Research Center, in his office at Vanguard’s headquarters in Malvern, Pennsylvania, Jan. 25, 2012.

It's the epitome of the low-cost mutual fund.

One of the simplest ways to invest, and get close to market-level returns, is with low-cost index funds. Of these kinds of funds, the Vanguard 500 Index Fund, which tracks the S&P 500, is one of the best-known and one of the largest, trailing only the Vanguard Total Stock Market Index Fund in total assets.

In short, lots of people have decided, since they can’t beat the market, they might as well be the market. Is that the right move for you? Furthermore, are there funds that follow other indices that offer better long-term potential? In short, there are other index funds — as well as individual stocks — that may be better-returning alternatives, but there’s still a lot to like about the Vanguard 500 Index Fund.

Let’s take a closer look at the fund itself (and the three share classes), as well as those alternatives.

Returns depend on which shares you own
Vanguard has long been the stalwart in low-cost index investing, since it was first started by Jack Bogle in the 1970s, and the Vanguard 500 Index Fund was the first of its kind. And while it remains one of the lowest-cost funds, it’s important to understand that there are actually three share classes within the fund, and depending on which shares you own, your returns will differ slightly:

Screen Shot 2015-07-23 at 2.07.07 PM

On the surface it looks like the ETF is a no-brainer, right? The best answer is, “it depends” because it varies by how much you’ll be able to invest up front, if the share class is even available to you (Admiral class shares aren’t typically available in most brokerage accounts), and how often you plan to reinvest new money, due to the impact of trading fees, especially for the ETF (which is traded on a stock exchange).

Here’s a look at how the expense ratio — which is the annual cost Vanguard charges to run the fund — alone has affected returns:

Screen Shot 2015-07-23 at 2.05.10 PM

Since just after launching the ETF shares, you can see that the difference in the expense ratio has affected total returns, while the ETF shares have also been affected by the more volatile nature of its trading on a stock index. Over a longer period of time, this would likely normalize, since it has the same intrinsic value as the other share types.

Which share class is best?
It’s largely a product of how much you have to invest, where you are investing it — i.e. 401(k) through your employer, a personal account with a discount broker, or directly with Vanguard — and how much/how often you will invest new money.

For example, a fund balance of below $10,000 in either mutual fund share class will cost a $20 per year service fee, while there’s no such fee for ETF shares. But you’ll be subject your broker’s commission rate if you buy ETF shares. As to the mutual fund shares, your broker may or may not even offer them for sale, limiting your options. The Admiral shares, as an example, are typically only available either directly through Vanguard, or through a Vanguard-managed relationship with your employer.

If you’re planning to invest less than $10,000, that $20 annual fee makes the “effective” expense ratio much higher, so if you’re not going to be able to get above that threshold, the ETF might be cheaper, unless you’re planning to invest new money regularly. If you are, then trading commissions would end up costing a lot more than $20 per year. In short, if you have the $3,000 minimum to invest and plan to add more on a regular basis, the investor shares are probably the best bet. If you will start with less, or buy new shares only occasionally, the ETF shares would be cheapest as long as your trading fees don’t break $20 per year.

Basically, figure out which share class will result in the least cost in fees and expenses based on how much you’ll invest, and invest in that class.

Make it part of a diverse portfolio
Even though the Vanguard 500 Index Fund is already diversified with exposure to the 500 largest U.S. public companies, you will improve your chances of the best long-term returns by not putting all of your eggs in this one basket of stocks.

It’s worth considering also investing in funds, like the iShares Russell 1000 Growth Index ETF ISHARES TRUST RUSSELL 1000 GROWTH INDEX F IWF -1.15% , adding exposure to more small companies, or the Vanguard Growth ETF VANGUARD INDEX FDS GROWTH VIPERS VUG -1.08% , (also available in mutual fund classes like the 500 Index Fund) which tracks the CRSP Large-Cap Growth Index — a collection of almost 400 more growth-oriented businesses than the S&P 500. Over the past several years, both of these funds have outperformed the 500 Index Fund, and there’s a lot of evidence that exposure to more companies with growth potential, versus just the S&P 500 components, can improve long-term returns.

Furthermore, there’s nothing wrong with investing a portion of your portfolio in index funds like these, while still investing in individual stocks. It will guarantee that you get market-level returns with at least a portion of your portfolio, while also trying to beat the market on your own. It’s hard to beat the market — most investors won’t. But it’s not impossible.

Either way, the Vanguard 500 Index Fund, after 40 years, remains one of the cheapest ways for the average investor to get market-level returns. If you’re looking for a low-cost, simple way to track the market’s returns, you could do worse.

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MONEY mutual funds

Yes, There Is a Proven Way to Choose Winning Funds

spectators watching horse race
Werner Otto—Alamy

It's not about being smarter than everyone else.

In the investing equivalent of betting on the ponies, thousands of investors and advisers scan mutual fund return data each day hoping to pick funds that will consistently stay at the top of the performance charts. Alas, it’s a waste of time, effort and money. Read on for a better way.

If you’re the type who thinks that by dint of diligent research, superior insights or just an uncanny ability to pick winning investments that you can get the inside track on which funds are likely to consistently outperform their peers in the years ahead, I’ve got four words of advice for you: Don’t count on it.

The latest version of Standard & Poor’s semi-annual Persistence Scorecard suggests that funds that rise to the top of the performance charts aren’t likely to stay there very long. For example, of the large-cap funds that were in the top performance quartile for the five years ending March 2010, only 21% stayed in the top quartile for the subsequent five-year period ending March 2015. By chance alone, you would expect 25% to remain in the top quartile. Mid- and small-cap funds did even worse, with only 14% and 11% respectively staying in the top quartile. Of the large-cap funds that were in the top half of performance for the five years ending March 2010, only 37% managed to stay in the top half over the five years through March 2015 vs. a random expectation of 50%. Some 37% of small-cap funds remained in the top half, while only 23% of mid-caps managed that feat. All in all, not very encouraging.

The S&P report goes through a mind-numbing array of different time periods and different ways of slicing and dicing the data. It looks at bond funds as well, which did slightly better than stock funds, but not enough to crow about. The report’s overall conclusion is that “relatively few funds consistently stay at the top.

This shouldn’t come as a surprise. After all, fund manager are by and large a smart, well-educated group who know a lot about investing and devote considerable effort and expense to generate competitive returns. Which makes it tough for any one of them to consistently outrun his peers. Sure, there are going to be exceptions—the occasional Peter Lynches and Warren Buffetts. Question is, can you pick them in advance before they create their phenomenal record, as opposed to identifying them with the benefit of 20/20 hindsight? The answer is no.

So what is the secret to picking funds that are likely to consistently outperform most of their peers over long stretches?

The secret’s really not very secret: stick to low-cost broad-based index funds or ETFs. One reason for opting for index funds is that you know exactly what you’re getting. When you buy an index fund, you get all the stocks in a market benchmark or a representative sample large enough to track the index. So you don’t have to worry that your large-cap manager is going to dip into small stocks or that your value-oriented manager is going to stretch the definition of value and buy high-flying tech issues to juice returns and look better than their peers. This certainty makes it easier to build a broadly diversified portfolio as you don’t have to worry that managers’ tactical moves might lead you with more (or less) exposure to some areas of the market than you intend.

And then there’s the cost advantage. A Morningstar study estimates that the asset-weighted expense ratio for all funds and ETFs was 0.64% in 2014. If, on the other hand, you simply averaged all fund and ETF expense ratios without regard for the assets they hold, the figure is a higher 1.19%. Regardless of which way you calculate fund expenses, you can easily find index funds and ETFs that charge less than 0.25% by contrast (and sometimes less than 0.10%), a significant saving. While there’s no guarantee that each dollar you save in expenses translates into a dollar of extra return, research does show that low-cost funds tend to outperform their high-cost peers. I’d also add that given forecasts for lower investment returns in the future, it’s all the more crucial to hold down the portion of gross return that goes to expenses.

Does this mean you’ve got to be a purist and limit yourself solely to index funds and ETFs? While I have no problem with going all-index—a total U.S. stock market fund for broad domestic stock exposure, a total U.S. bond market fund for your bond stake and a total international fund if you want to include foreign shares in your asset mix—I don’t contend you would be totally undermining your investing efforts if you throw in the occasional actively managed fund, provided it has low expenses. Indeed, a new Morningstar report comparing index funds and actively managed portfolios found that while index funds generally outperform their actively managed peers, those active funds with low expenses tend to shape up much better vs index portfolios than high-fee actively managed portfolios.

But let’s face it. The main reason most investors opt for active funds is because, as with horse racing, we like the challenge of trying to pick a winner and we get a thrill when our bet pays off. But that challenge is a lot stiffer than many investors believe, and the payoffs too iffy to make the whole fund-picking exercise worthwhile.

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

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MONEY mutual funds

A New Take on the Indexing Versus Actively Managed Funds Debate

And the winner is...

It’s another win for index funds.

If you’re a regular MONEY reader you’ll know the mutual fund world has been split by a long-running debate between two fundamentally different investment strategies: Active investing, where funds employ portfolio managers to attempt to select stocks that beat the market benchmarks like the Standard & Poor’s 500, and indexing, where funds aim merely to match the performance of the benchmarks.

While it may be counter-intuitive, academic research has shown that because of a) the inherent difficulty of consistently picking stocks that outperform the market averages and b) the extra costs incurred by these funds for things like research, brokerage fees, and manager salaries, only the most skillful stock pickers actually end up beating the benchmarks over long periods of time. Plus, determining who those managers are in advance is a fool’s game.

Not surprisingly, given the livelihoods at stake, this is a controversial conclusion. Now fund researcher Morningstar has offered up a new approach to the debate. While index funds are known for keeping investment fees as low as possible, costs can put a drag on their returns, too. So Morningstar set out to compare active funds not just to the returns of market indexes, but to the actual index funds that attempt to track them. The method could arguably yield a fairer comparison, more in line with what investors actually experience.

Unfortunately for the partisans of active management, the results were as clear-cut as those of any previous study, if not more so. Among the twelve types of funds Morningstar examined—from large blend stock funds to intermediate bond funds—the majority of active funds beat their passive counterparts in just one category over the past decade: U.S. mid-cap value.

Morningstar did find that investors could improve their odds by focusing on active funds that had lower costs. The majority of low-cost active funds, those in the least expensive quartile of their peers, beat low cost index funds in five of twelve categories, including U.S. large and mid-cap value funds.

Of course, since cost is still the key factor, that’s likely to be cold comfort to many active investors.


MONEY mutual funds

Why the Simplest Investing Option Is Still the Best

illustration of house of $100 bill cards
Taylor Callery

Stock-picking fund managers have started the year strong. But indexing still has the edge.

On Wall Street, the knives are out for index funds. In the past few months this low-cost strategy—in which funds buy and hold all stocks in an index like the S&P 500 instead of picking and choosing—has been called a fad, a mania, and mindless. It has been blamed for market volatility. One recent anti-index broadside, a report by Wintergreen Advisers, even pins runaway CEO pay on the funds.

Why are proponents of “active” management so riled up? Maybe it’s because of this: Since 2009 investors have yanked $257 billion out of actively managed stock portfolios while pouring $1.1 trillion into stock index funds.

Sour grapes? Or should you worry that index funds’ popularity is a bubble ready to deflate? Let’s take a look at three popular arguments against indexing.

Argument #1: It’s a Stock Picker’s Market Again!

Diversified stock funds gained 2.6% in the first quarter of 2015, vs. 0.95% for the S&P 500 index. Yet over the past one, three, five, and—keep counting—10 years, less than 25% of blue-chip stock funds beat their index.

Argument #2: Okay, But Wait Until a Bear Market Strikes…

It seems like common sense that active managers should do better in a down market, since index funds must hold all the stocks in a market—in good times and bad. In the 2008 bear, however, most active managers fell at least as much as their bogey, says John Rekenthaler, vice president of research at Morningstar.

Active funds looked stronger during the dotcom crash in 2000. A bubble in one part of the market meant some managers could hide in cheaper small-cap and value-oriented stocks. These days, though, even traditional value stocks look pricey. “Where is the refuge for active managers in this market?” asks Rekenthaler. “I don’t see one.”

Argument #3: If Indexing Gets Too Popular, Active Funds Will Win.

One reason it’s hard to beat the market is that whenever you bet on a stock, there’s another clever trader taking the other side. If everyone indexes, though, maybe there’s less “smart money” in the market to match wits against, making it easier to find opportunities in mispriced stocks. We’re a long way from that day, though. Indexing still accounts for just 15% of the money in various kinds of U.S. funds. Besides, if active funds did start beating the market consistently, you can count on money, both smart and dumb, pouring into those strategies. At that point watch the odds shift back to indexers.

MONEY retirement planning

4 Signs You May Be Addicted to “Financial Porn”

rabbit trap with money under it
Getty Images

If you like to follow what the smart money is doing, you're probably hurting your returns.

“Financial porn,” or money advice that teases and titillates more than it informs, is ubiquitous these days, promising everything from safe returns with no risk to all-gain-no-pain paths to financial success. All of which would be harmless enough, except it can create false expectations and lead to poor financial decisions. Here are four signs that you may be at risk.

1. You’re a sucker for double-your-money schemes. With stock valuations on the gaseous side and many advisers forecasting well-below-average returns for the future, you might think that few investors would be receptive to the lure of doubling their money in a hurry. But you don’t have to look hard to find stories touting stocks in areas ranging from biotech to real estate that are supposedly capable of doing that in a year, or less. (One article even talks about doubling one’s money in five hours!) In the event you find this too extreme, not to worry: There’s a seemingly endless stream of articles on stocks, funds and ETFs that will merely beat the market.

Given the plethora of investments available, there will always be some that outpace the market or even double in value quickly. And you won’t have trouble finding them with the benefit of 20/20 hindsight. But the reality is that it’s nearly impossible to identify such top-performers consistently in advance. Besides, any investment with the potential for huge returns also comes with outsize risk. Rather than speculating on which stocks or funds might clobber their peers or shooting for unrealistic gains, you’re better off building a low-cost diversified portfolio of index funds or ETFs that reflects your risk tolerance. This approach might not deliver the thrill of seeing an occasional pick pay off handsomely. But you’ll avoid the inevitable (and more frequent) spills that occur when risky high-fliers flame out.

2. You like to follow the “smart money.” It seems like such a simple and effective route to financial success: Piggyback on the moves of the financial pros and market savants who supposedly know better than the rest of us. And a constant supply of stories purports to offer us insights into what financial savants are up to. But there are a couple of things you need to know about this oft-cited advice.

One is that it’s not always clear what the smart money is doing. Depending on which story you believe, the smart money has recently been buying precious metals or energy stocks or consumer discretionary shares or getting out of stocks altogether. Or maybe the smart money’s been making these moves serially or doing them all at the same time. Who knows? And really, who cares? Because the the second thing you need to know about the smart money is that it isn’t always so smart. In fact, “dumb” index funds beat the majority of “smart” money managers over the long-term. So don’t waste time and effort tracking the smart money (whoever the smart money is). Invest based on your financial needs. That’s the smart thing to do.

3. You’re a seeker of “secret” solutions. We all like the idea of getting a tip from an insider. Which is no doubt why there’s no shortage of stories that rope us in with the promise of letting us in on some secret, whether it’s the investing secrets only the pros know, the secrets to a successful retirement, the secret to financial success or (kudos for killing two birds with one stone) the secret to doubling your money.

But we all know that real secrets are rare in the financial world. Want a secure retirement? It’s no secret that the secret is getting an early start on saving and then saving diligently throughout your career. Investing? The open secret there is that it’s virtually impossible to consistently beat the market, so your best shot at investing success lies in creating a low-cost diversified portfolio and rebalancing periodically.

Which is why stories that claim to share secrets are almost always a tease. The secrets are usually things we already know, or ought to. That said, I don’t think the desire to unearth secrets is dangerous so much as a diversion that might distract you from focusing more on what’s really important in investing and planning. In the spirit of full disclosure, I should also add that I’m not above reproach when it comes to divulging putative secrets, witness the headline of this story: Is Sex The Secret To A Happy Retirement?

4. You love hearing about new and novel investments. Whether it’s skittishness about stocks and bonds in today’s market or a natural desire to want to spice things up, many investors are on the lookout for fresh, cutting-edge investment opportunities. And advisers, as well as personal finance journalists, are more than willing to cater to that desire by touting all manner of “alternative” investments. The choices range from what you might call the usual suspects—long-short and absolute-return funds, private equity, hedge funds, commodity funds, etc.—to more arcane offerings: tax-lien certificates, parking spots, equipment leases, peer-to-peer lending and fishing rights, to name a few.

But sprinkling a helping of such investments into your portfolio no more guarantees a well-diversified portfolio than helping yourself to every item on a smorgasbord assures a balanced diet. If anything, once you go beyond a healthy mix of U.S. stocks and bonds and perhaps a dollop of international shares, you run the risk of di-worse-ifying rather than diversifying. Besides, most investors are unable or unwilling to do the research necessary to make informed decisions about esoteric investments. Throw in the fact that fringe investments often come with lofty fees (often to pay the person peddling them), and your chances of doing better loading up with alternatives than you would be simply sticking to a plain-vanilla portfolio of low-cost index funds and ETFs are slim. Which is to say, just because investment firms regularly market sorts of new investments doesn’t mean you should fall for their pitch.

Financial porn has been around a long time, even well before Jane Bryant Quinn first coined the phrase “investment porn” in a Newsweek column back in 1995. And given the fertile ground of the internet, I expect it will continue to grow like kudzu in the years ahead. Read it, if you like; enjoy it, if you can. Just don’t rely on it for your planning and investing.

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

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3 Ways to Build a $1 Million Nest Egg Despite Lower Investment Returns

Andy Roberts/Getty Images

Whether your retirement goal is six figures or seven figures, it's harder to achieve in today's market—unless you have a plan.

A new Transamerica Center for Retirement Studies survey found that $1 million is the median savings balance people estimate they’ll need for retirement. And many savers have been able to reach or exceed that goal, according a report last year by the Government Accountability Office showing that some 630,000 IRA account owners have balances greater than $1 million.

But most of these people accumulated those hefty sums in an era of generous investment returns. Between 1926 and 2014, large-company stocks gained an annualized 10.1%, while intermediate-term government bond returned 5.3% annually, according to the 2015 Ibbotson Classic Yearbook. During the go-go ’90s annualized gains were even higher—18.2% for stocks and 7.2% for bonds. Today, however, forecasts like the one from ETF guru Rick Ferri call for much lower gains, say, 7% annualized for stocks and 4% or so for bonds. Which makes building a seven-figure nest egg more of a challenge.

Still, the goal remains doable, if you go about it the right way. Here are three steps that can increase your chances of pulling it off.

1. Get in the game as early as possible—and stay in as long as you can. The more years you save and invest for retirement, the better your chances of building a big nest egg. Here’s an example. If you’re 25, earn $40,000 a year, receive annual raises of 2% during your career and earn 5% a year after expenses on your savings—a not-too-ambitious return for a diversified portfolio of stocks and bonds—you can accumulate a $1 million account balance by age 65 by saving a bit more than 15% of salary each year. That’s pretty much in line with the recommendation in the Boston College Center For Retirement Research’s “How Much Should People Save?” study.

Procrastinate even a bit, however, and it becomes much tougher to hit seven figures. Start at 30 instead of 25, and the annual savings burden jumps to nearly 20%, a much more challenging figure. Hold off until age 35, and you’ve got to sock away more a far more daunting 24% a year.

Of course, for a variety of reasons many of us don’t get as early a start as we’d like. In that case, you may be able to mitigate the savings task somewhat by tacking on extra years of saving and investing at the other end by postponing retirement. For example, if our hypothetical 25-year-old puts off saving until age 40, he’d have to sock away more than 30% a year to retire at 65 with $1 million. That would require a heroic saving effort. But if he saved and invested another five years instead of retiring, he could hit the $1 million mark by socking away about 22% annually—still daunting, yes, but not nearly as much as 30%. What’s more, even if he fell short of $1 million, those extra years of work would significantly boost his Social Security benefit and he could safely draw more money from his nest egg since it wouldn’t have to last as long.

2. Leverage every saving advantage you can. The most obvious way to do this is to make the most of employer matching funds, assuming your 401(k) offers them, as most do. Although many plans are more generous, the most common matching formula is 50 cents per dollar contributed up to 6% of pay for a 3% maximum match. That would bring the required savings figure to get to $1 million by 65 down a manageable 16% or so for our fictive 25-year-old, even if he delayed saving a cent until age 30. Alas, a new Financial Engines report finds that the typical 401(k) participant misses out on $1,336 in matching funds each year.

There are plenty of other ways to bulk up your nest egg. Even if you’re covered by a 401(k) or other retirement plan, chances are you’re also eligible to contribute to some type of IRA. (See Morningstar’s IRA calculator.) Ideally, you’ll shoot for the maximum ($5,500 this year; $6,500 if you’re 50 or older), but even smaller amounts can add up. For example, invest $3,000 a year between the ages of 25 and 50 and you’ll have just over $312,000 at 65 even if you never throw in another cent, assuming a 5% annual return.

If you’ve maxed out contributions to tax-advantaged accounts like 401(k)s and IRAs, you can boost after-tax returns in taxable accounts by focusing on tax-efficient investments, such as index funds, ETFs and tax-managed funds, that minimize the portion of your return that goes to the IRS. Clicking on the “Tax” tab in any fund’s Morningstar page will show you how much of its return a fund gives up to taxes; this Morningstar article offers three different tax-efficient portfolios for retirement savers.

3. Pare investment costs to the bone. You can’t force the financial markets to deliver a higher rate of return, but you can keep more of whatever return the market delivers by sticking to low-cost investing options like broad-based index funds and ETFs. According to a recent Morningstar fee study, the average asset-weighted expense ratio for index funds and ETFs was roughly 0.20% compared with 0.80% for actively managed mutual funds. While there’s no assurance that every dollar you save in expenses equals an extra dollar of return, low-expense funds to tend to outperform their high-expense counterparts.

So, for example, if instead of paying 1% a year in investment expenses, the 25-year-old in the example above pays 0.25%—which is doable with a portfolio of index funds and ETFs—that could boost his annual return from 5% to 5.75%, in which case he’d need to save just 13% of pay instead of 15% to build a $1 million nest egg by age 65, if he starts saving at age 25—or just under 22% instead of 24%, if he procrastinates for 10 years. In short, parting investment expenses is the equivalent of saving a higher percentage of pay without actually having to reduce what you spend.

People can disagree about whether $1 million is a legitimate target. Clearly, many retirees will need less, others will require more. But whether you’ve set $1 million as a target or you just want to build the largest nest egg you can, following the three guidelines will increase your chances of achieving your goal, and improve your prospects for a secure retirement.

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

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How to Save For Retirement When You Don’t Have a 401(k)

Ask the Expert Retirement illustration
Robert A. Di Ieso, Jr.

Q: The company I work for doesn’t offer a 401(k). I am young professional who wants to start saving for retirement but I don’t have a lot of money. Where should I start? – Abraham Weiser, New York City

A: Millions of workers are in the same boat. One-quarter of full-time employees are at companies that don’t offer a retirement plan, according to government data. The situation is most common at small firms: Only 50% of workers at companies with fewer than 100 employees have 401(k)s vs. 82% of workers at medium and large companies.

Certainly, 401(k)s are one of the best ways to save for retirement. These plans let you make contributions directly from your paycheck, and you can put away a large amount ($18,000 in 2015 for those 49 and younger), which can grow tax sheltered.

But there are retirement savings options beyond the 401(k) that also offer attractive tax benefits, says Ryan P. Tuttle, a certified financial planner at Connecticut Wealth Management in Farmington, Ct.

Since you’re just getting started, your first step is to get a handle on your spending and cash flow, which will help you determine how much you can really afford to put away for retirement. If you have a lot of high-rate debt—say, student loans or credit cards—you should also be paying that down. But if you have to divert cash to pay off loans, you won’t be able to put away a lot for savings.

That doesn’t mean you should wait to put money away for retirement. Even if you can only save a small amount, perhaps $50 or $100 a week, do it now. The earlier you get going, the more time that money will have to compound, so even a few dollars here or there can make a big difference in two or three decades.

You can give an even bigger boost to your savings by opting for a tax-sheltered savings plan like an Individual Retirement Account (IRA), which protects your gains from Uncle Sam, at least temporarily.

These come in two flavors: traditional IRAs and Roth IRAs. In a traditional IRA, you pay taxes when you withdraw the money in retirement. Depending on your income, you may also qualify for a tax deduction on your IRA contribution. With a Roth IRA, it’s the opposite. You put in money after paying taxes but you can withdraw it tax free once you retire.

The downside to IRAs is that you can only stash $5,500 away each year, for those 49 and younger. And to make a full contribution to a Roth, your modified adjusted gross income must be less than $131,000 a year if you’re single or $193,000 for those married filing jointly.

If your pay doesn’t exceed the income limit, a Roth IRA is your best option, says Tuttle. When you’re young and your income is low, your tax rate will be lower. So the upfront tax break you get with a traditional IRA isn’t as big of a deal.

Ideally, you’ll contribute the maximum $5,500 to your IRA. But if you don’t have a chunk of money like that, have funds regularly transferred from your bank account to an IRA until you reach the $5,500. You can set up an IRA account easily with a low-fee provider such as Vanguard, Fidelity or T. Rowe Price.

Choose low-cost investments such as index funds and exchange-traded funds (ETFs); you can find choices on our Money 50 list of recommended funds and ETFs. Most younger investors will do best with a heavier concentration in stocks than bonds, since you’ll want growth and you have time to ride out market downturns. Still, your asset allocation should be geared to your individual risk tolerance.

If you end up maxing out your IRA, you can stash more money in a taxable account. Look for tax-efficient investments that generate little or no taxable gains—index funds and ETFs, again, may fill the bill.

Getting an early start in retirement savings is smart. But you should also be investing in your human capital. That means continuing to get education and adding to your skills so your earnings rise over time. Your earnings grow most quickly in those first decades of your career. “The more you earn, the more you can put away for retirement,” says Tuttle. As you move on to better opportunities—with any luck—you’ll land at a company that offers a great 401(k) plan, too.

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Read next: Quick Guide to How Much You Need to Retire

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