MONEY 401(k)s

Why This Popular Retirement Investment May Leave You Poorer

140718_REA_TARGETFUNDS
slobo—Getty Images

Target-date funds are supposed to be simple all-in-one investments, but there's a lot more going on than meets the eye.

Considering my indecision about how to invest my retirement portfolio (see “Do I Really Need Foreign Stocks in My 401(k)?”) you would think there’s an easy solution staring me in the face: target-date funds, which shift their asset mix from riskier to more conservative investments on a fixed schedule based on a specific retirement date.

These funds often come with attractive, trademarked names like “SmartRetirement” and are marketed as “all-in-one” solutions. But while they certainly make intuitive sense, they are not remotely as simple as they sound.

First introduced about two decades ago, the growth of target-date funds was spurred by the Pension Protection Act of 2006, which blessed them as the default investment option for employees being automatically enrolled by defined contribution plans, such as 401(k)s. And indeed, investing in a target-date fund is certainly better than nothing. But the financial crisis of 2008 raised the first important question about target-date funds when some of them with a 2010 target turned out to be overexposed to equities and lost up to 40% of their value: Are these funds supposed to merely take you up to retirement, or do they take you through it for the next 20 to 30 years?

The answer greatly determines a fund’s “glide path,” or schedule for those allocation shifts. The funds that take you “to” retirement tend to be more conservative, while the “through” funds hold more in stocks well into retirement. Still, even target-date funds bearing the same date and following the same “to” or “through” strategy may have a very different asset allocations. For a solution that’s supposed to be easy, that’s an awful lot of fine print for the average investor to read, much less understand.

Then there is the question of timing for those shifts in asset allocation. Some target-date funds opt for a slow and gradual reduction of stocks (and increase in bonds), which can reduce risk but also reduce returns, since you receive less growth from equities. Others may sharply reduce the stock allocation just a few years before the target date—the longer run in equities gives investors a shot at better returns, but it’s also riskier. Which is right for you depends on how much risk you can tolerate and whether you’d be willing to postpone retirement based on market conditions, as many were forced to do after 2008.

In short, no one particular portfolio is going to meet everyone’s needs, so there’s a lot more to consider about target-date funds than first meets the eye. If I were to go for a target-date fund, I would probably pick one that doesn’t follow a set glide path but is instead “tactically managed” by a portfolio manager in the same manner as a traditional mutual fund. A recent Morningstar report found that “contrary to the academic and industry research that suggests it’s difficult to consistently execute tactical management well, target-date series with that flexibility have generally outperformed those not making market-timing calls.”

Maybe it’s the control freak in me, but I prefer selecting my own assortment of funds instead of using a target-date option where the choices are made for you. Granted, managing my own retirement portfolio was a lot simpler when I was young and had a seemingly limitless appetite for risk. But even as I get older and diversification becomes more important, I still want to be in the driver’s seat. Anyone can pick a target, but there is no one, single, easy way to get there.

Konigsberg is the author of The Truth About Grief, a contributor to the anthology Money Changes Everything, and a director at Arden Asset Management.

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MONEY stocks

WATCH: What’s the Point of Investing?

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

MONEY target date funds

Target-Date Funds Try Timing the Market

Managers of target-date retirement funds seek to boost returns with tactical moves. Will their bets blow up?

Mutual fund companies are trying to juice returns of target-date funds by giving their managers more leeway to make tactical bets on stock and bond markets, even though this could increase the volatility and risk of the widely held retirement funds.

It’s an important shift for the $651 billion sector known for its set-it-and-forget-it approach to investing. Target-date funds typically adjust their mix of holdings to become more conservative over time, according to fixed schedules known as “glide paths.”

The funds take their names from the year in which participating investors plan to retire, and they are often used as a default investment choice by employees who are automatically enrolled in their company 401(k) plans. Their assets have grown exponentially.

The funds’ goal is to reduce the risk investors take when they keep too much of their money in more volatile investments as they approach retirement, or when they follow their worst buy-high, sell-low instincts and trade too often in retirement accounts.

So a move by firms like BlackRock Inc., Fidelity Investments and others to let fund managers add their own judgment to pre-set glide paths is significant. The risk is that their bets could blow up and work against the long-term strategy—hurting workers who think their retirement accounts are locked into safe and automatic plans.

Fund sponsors say they aren’t putting core strategies in danger—many only allow a shift in the asset allocation of 5% in one direction or another—and say they actually can reduce risk by freeing managers to make obvious calls.

“Having a little leeway to adjust gives you more tools,” said Daniel Oldroyd, portfolio manager for JPMorgan Chase & Co’s SmartRetirement funds, which have had tactical management since they were introduced in 2006.

GROWING TACTICAL APPROACH

BlackRock last month introduced new target-date options, called Lifepath Dynamic, that allow managers to tinker with the glide path-led portfolios every six months based on market conditions.

Last summer, market leader Fidelity gave managers of its Pyramis Lifecycle strategies—used in the largest 401(k) plans—a similar ability to tweak the mix of assets they hold.

Now it is mulling making the same move in its more broadly held Fidelity target-fund series, said Bruce Herring, chief investment officer of Fidelity’s Global Asset Allocation division.

Legg Mason Inc says it will start selling target-date portfolios for 401(k) accounts within a few months whose allocations can be shifted by roughly a percentage point in a typical month.

EARLY BETS PAYING OFF

So far, some of the early tactical target-date plays have paid off. Those funds that gave their managers latitude on average beat 61% of their peers over five years, according to a recent study by Morningstar analyst Janet Yang. Over the same five years, funds that held their managers to strict glide paths underperformed.

But the newness of the funds means they have not been tested fully by a market downturn.

“So far it’s worked, but we don’t have a full market cycle,” Yang cautioned.

The idea of putting human judgment into target-date funds raises issues similar to the long-running debate over whether active fund managers can consistently outperform passive index products, said Brooks Herman, head of research at BrightScope, based in San Diego, which tracks retirement assets.

“It’s great if you get it right, it stings when you don’t. And, it’s really hard to get it right year after year after year,” he said.

MONEY

Does Anybody Need a Money-Market Fund Anymore?

New regulations are meant to protect money market mutual funds from another 2008-like panic.

On Thursday, the Wall Street Journal reported that the Securities and Exchange Commission is expected to approve new regulations for money-market mutual funds. Remember money-market funds? Before the financial crisis, these funds were very popular places to stash money because each share was expected to maintain $1 value. Your principal would remain the same, and the fund would pay substantially higher interest rates than a bank savings account.

But these days for retail investors, money-market mutual funds are something of an afterthought.

So why is the SEC intent on regulating them now? And will tighter rules push them further into irrelevance? Here’s what you need to know:

What going on?

A money-market fund is a mutual fund that’s required by law to invest only in low-risk securities. (Don’t confuse funds with money-market accounts at FDIC-insured banks. These rules don’t affect those.)

There are different kinds of money-market funds. Some are aimed at retail investors. So-called prime institutional funds, on the other hand, are higher-yielding products used by companies and large investors to stash their cash. The big news in the proposed rules affects just the prime institutional funds.

Prime institutional funds would have to let their share price float with the market, effectively removing the $1 share price expectation.

The SEC reportedly also wants to impose restrictions preventing investors from pulling their money out of these funds during times of instability, or discouraging them from doing so by charging a withdrawal fee. It’s unclear from the reporting so far which kinds of funds this would affect.

Why is the SEC doing this?

As MONEY’s Penelope Wang wrote in 2012 when rumors of new regulations were first circulating, the financial crisis revealed serious vulnerabilities to money-market funds. When shares in a $62 billion fund fell under $1 in 2008, it triggered a run on money markets.

In order to stabilize the funds, Washington was forced to step in and offer FDIC insurance (the same insurance that protects your bank account). That insurance ran out in 2009, and now the funds are once again unprotected against another run.

The majority of the SEC believes a primary way to prevent future panics is to remind investors that money-market funds are not the same as an FDIC-insured money-market account at a bank. Before the crisis, the funds seemed like a can’t-lose proposition. The safety of a savings account with double the return? Sign me up. But as investors learned, you actually can lose.

What does it mean for you?

Not much, at least not right away. The floating rate rules only apply to prime institutional funds, which the Wall Street Journal says make up about 37% of the industry.

The change also won’t be very important until money-market funds look more attractive than they do today. Historically low interest rates from the Federal Reserve have actually made conventional savings accounts a more lucrative place to deposit money than money-market funds. The average money-market fund returns 0.01% interest according to iMoney.net. That’s slightly less than a checking account.

Investors have already responded to money funds’ poor value proposition by pulling their money out. In August of 2008, iMoney shows there was $758.3 billion invested in prime money fund assets. In March of 2014, that number had gone down to $497.3 billion.

Finally, it appears unlikely that money-market funds will ever be as desirable as they were pre-crisis. As the WSJ’s Andrew Ackerman points out, money funds previously offered high returns, $1-to-$1 security, and liquidity. Interest rates have killed the returns, and the new regulations will limit liquidity and kill the dollar-for-dollar promise.

Don’t count the lobbyists out yet

Fund companies are really, really unhappy about the SEC’s proposed regulations. They’ve been fighting the rules for years, and until there’s an official announcement, you shouldn’t be sure anything is actually going to happen.

Others are worried the new regulations, specifically redemption restrictions, might actually cause runs on the market as investors fear they could be prevented from pulling money out if things get worse.

But the SEC may have picked a perfect time to do this. With rates so low, few retail savers care much about money-market funds. That wasn’t true back when yields were richer and any new regulation of money-market funds might have been met with a hue and cry from middle-class savers. Today? Crickets.

MONEY Portfolios

For $50 You Can Push For More Female CEOs — But Is It a Good Investment?

Indra Nooyi, chairman and chief executive officer of PepsiCo.
Indra Nooyi, chairman and chief executive officer of PepsiCo. Bloomberg—Bloomberg via Getty Images

Two new products let you invest in companies led by female executives. Whether this is a good idea depends on what you hope to achieve.

On Thursday, Barclays is launching a new index and exchange-traded note (WIL) that lets retail investors buy shares — at $50 a pop — of a basket of large U.S. companies led by women, including PepsiCo, IBM, and Xerox. This should be exciting news for anyone disappointed by the lack of women in top corporate roles.

After all, female CEOs still make up less than 5% of Fortune 500 chiefs and less than 17% of board members — despite earning 44% of master’s degrees in business and management.

The new ETN is not the only tool of its kind: This past June, former Bank of America executive Sallie Krawcheck opened an index fund tracking global companies with female leadership — and online brokerage Motif Investing currently offers a custom portfolio of shares in women-led companies.

The big question is whether this type of socially-conscious investing is valuable — either to investors or to the goal of increasing female corporate leadership. Is it wise to let your conscience dictate how you manage your savings? And assuming you care about gender representation in the corporate world, is there any evidence that these investments will actually lead to more diversity?

Here’s what experts and research suggest:

Getting better-than-average returns shouldn’t be your motivation. Beyond the promise of effecting social change, the Barclays and Pax indexes are marketed with the suggestion that woman-led companies tend to do better than peers. It’s true that some evidence shows businesses can benefit from female leadership, with correlations between more women in top positions and higher returns on equity, lower volatility, and market-beating returns.

But correlation isn’t causation, and other research suggests that when businesses appoint female leadership, it may be a sign that crisis is brewing — the so-called “glass cliff.” Yet another study finds that limiting your investments to socially-responsible companies comes with costs.

Taken together, the pros and cons of conscience-based investing seem generally to cancel each other out. “Our research shows socially responsible investments do no better or worse than the broader stock market,” says Morningstar fund analyst Robert Goldsborough. “Over time the ups and downs tend to even out.”

As always, fees should be a consideration. Even if the underlying companies in a fund are good investments, high fees can eat away at your returns. Krawcheck’s Pax Ellevate Global Women’s fund charges 0.99% — far more than the 0.30% fee for the Vanguard Total World Stock Index (VTWSX). Investing only in U.S. companies, the new Barclays ETN is cheaper, with 0.45% in expenses, though the comparable Vanguard S&P 500 ETF (VOO) charges only 0.05% — a difference that can add up over time:

image-29
Note: Projections based on current expenses and a $10,000 investment.

If supporting women is very important to you, you might consider investing in a broad, cheap index and using the money you saved on fees to invest directly in the best female-led companies — or you could simply donate to a non-profit supporting women’s causes.

If you still love this idea, that’s okay — just limit your exposure. There is an argument that supporting female leadership through investments could be more powerful than making a donation to a non-profit. The hope is that if enough investor cash flows to businesses led by women, “companies will take notice” and make more efforts to advance women in top positions, says Sue Meirs, Barclays COO for Equity and Funds Structured Markets Sales in the Americas. If investing in one of these indexes feels like the best way to support top-down gender diversity — and worth the cost — you could do worse than these industry-diversified offerings. “Investing as a social statement can be a fine thing,” says financial planner Sheryl Garrett, “though you don’t want to put all of your money toward a token investment.” Garrett suggests limiting your exposure to 10% of your overall portfolio.

MONEY mutual funds

Good Grief! Investors are Betting on a Big Budget Charlie Brown Film

Snoopy and Charlie Brown from Charles Schulz's timeless "Peanuts"
For the first time ever, Snoopy, Charlie Brown and the rest of the gang we know and love from Charles Schulz's timeless "Peanuts" comic strip will be making their big-screen debut -- like they've never been seen before in a CG-animated feature film in 3D. Blue Sky Animation

With a blockbuster Peanuts film set to appear in theaters next year, funds have been buying shares of the company that owns 80% of the rights to the beloved characters.

Can Snoopy, Lucy, and Charlie Brown captivate another generation of Americans?

Wall Street seems to think so.

With a big-budget Peanuts film set to appear in theaters next year, an unusually high number of U.S. mutual funds have been buying shares of Iconix Brand Group , the little-known company that owns 80% of the rights to the characters that first made their way onto newspaper comic pages more than 60 years ago.

The number of new funds owning shares swelled 36% last quarter, according to Morningstar. That is a high number for a small-capitalization stock with a market value of $1.9 billion and a slowing core business.

The stock is up more than 40% over the past 12 months, which is about 15 percentage points better than the broad market.

Few consumers have ever heard of the New York-based company, though they may be familiar with its roster of 35 brands, ranging from mass-market staples like Joe Boxer and Ed Hardy to Cannon linens and Material Girl, the line of apparel and accessories from Madonna and her daughter.

But with many of its U.S. retail partners, such as Target , Macy’s and Sears , struggling with falling traffic and weak consumer demand, Iconix is looking elsewhere to expand — such as films.

“With what is happening in America we don’t see large growth there over the next couple of years but we do see stability,” Chief Executive Neil Cole, the brother of fashion designer Kenneth Cole, told analysts after the company reported its quarterly results in April.

PEANUTS BRAND

Should the Peanuts movie prove to be a hit, it could help Iconix double its revenues, which hit $433 million in 2013, Cole told analysts. The company declined to comment for this story.

Already, the brand has paid some dividends: ABC, owned by the Walt Disney Co. , renewed its long-standing contract to air the popular Peanuts holiday specials 18 months before it came due.

There is no telling how well the movie will be received, of course. For every hit like “The Lego Movie,” which has brought in $256.7 million at the U.S. box office, according to Box Office Mojo, there has been a film like 2013′s “The Lone Ranger,” whose $89 million in U.S. box-office take paled against an estimated cost of $215 million.

Though the percentage that Iconix could reap from next year’s film was not disclosed, the Peanuts brand should command a premium, said Charles Grimes, a Norwalk, Connecticut, attorney who specializes in character licensing and has worked with properties including Archie comics and Disney characters. It would “not be inconceivable” for the company to get an upfront fee of $10 million or more for the theatrical release of the film, plus additional fees once the box office draw topped certain milestones, Grimes said.

Iconix would also likely get between 7% and 14% of film merchandise tie-ins, such as T-shirts or toys, he said.

“Peanuts has a huge growth ahead of it,” said Cliff Greenberg, who manages $5.5 billion in the Baron Small Cap fund and has been buying shares of Iconix on dips in expectations that it will continue to expand its entertainment division.

Chris Terry, an analyst at Dallas-based Hodges Capital, said his firm began buying shares approximately six months ago on expectations that the Peanuts license will pay off.

RISKS AHEAD

There is caution, however, in some quarters.

The lack of clear numbers regarding Peanuts’ contribution gives Steve Marotta, an analyst at C.L. King & Associates who covers the stock, pause.

“The company is a bit of black box,” he said. He estimates that Peanuts is the most important individual brand to the company, followed by Mossimo and Candie’s.

Nevertheless, he has a “buy” rating on the stock.

The shares trade at a price/earnings ratio of 15.3, a full point lower than the 16.7 average among apparel companies.

Eric Beder, an analyst at Brean Capital, said he has a “hold” rating because Iconix has not bought any new brands this year after typically adding two or three annually.

“The company doesn’t usually beat by much and usually never misses,” he said. “But right now it’s a question of finding the right deals and that isn’t happening.”

MONEY Ask the Expert

Can I Diversify My Portfolio With One ETF Rather than Four?

Q: Does investing in a “total stock market index fund” give you diversified exposure to large-, medium-, and small-sized companies? Or do I need to invest in separate mutual funds for my large- and small-company stocks? — Toby, Davis Junction, IL

A: No, you don’t need separate funds. The Vanguard Total Stock Market ETF is designed to give you exposure to a broad cross-section of different types of domestic equities in a single exchange-traded fund.

Its portfolio breaks down like this: around 72% is invested in large companies, a little less than 20% is in medium-sized businesses, about 6% is in small-company shares, and 3% is in so-called micro-cap stocks.

Now, you can achieve similar diversification by allocating your dollars into a collection of more narrowly constructed funds that focus on industry-leading large companies or quick-growing but volatile small companies.

For instance, you could pick up Money 50 funds Schwab S&P 500 Index , with iShares Core S&P Mid-Cap and iShares Core S&P Small Cap . (Although, if you’re not careful, you might end up with more exposure to smaller companies than you want. About 30% of IJR’s portfolio is in micro-cap stocks.)

All things being equal, says BKD Wealth Advisors’ portfolio manager Nick Withrow, you’re better off going with the one fund than three or four.

For one thing, each fund comes with its own expenses. If VTI dovetails with your risk tolerance, then you’ve taken care of your domestic stock portfolio at a measly cost of 0.05% of assets annually. That’s marginally cheaper, by about 0.06 percentage points, than buying a host of exchange-traded funds that collectively approximate VTI’s portfolio, says Withrow.

But there’s another reason — you.

Basically, you don’t want to get into the business of buying and selling ETFs to try and time the market. And you’re much less likely to get into that expensive habit if you buy-and-hold one fund, rather than picking three or four.

“The more choices an investor has, the more apt he or she is to feel that they have to do something,” says Withrow. “The idea of simplicity, especially with a buy-and-hold attitude, goes a long way.”

Of course, one total market exchange-traded fund doesn’t mean your portfolio is complete. Don’t forget about foreign equities or, you know, bonds. But when it comes to U.S. stocks, one cheap total market ETF (like VTI) is particularly useful.

MONEY mutual funds

Can Indexing Actually Grow Too Big and Fail?

As index funds are sopping up the world's investment dollars, an argument is emerging that this will eventually tip the scales back in favor of active managers. Don't worry just yet.

Indexing has always been a bit of a conundrum.

When this strategy — which calls for simply owning all the stocks in a market, rather than picking and choosing “the best” securities — hit Wall Street in the 1970s, it was regarded as downright “un-American.”

After all, why would any investor settle for the market’s average returns through indexing, when they could hitch their wagon to a stock picker whose goal is always to be above-average?

Well it turns out that over the long run, the vast majority of stock pickers aren’t consistently able to generate above-average returns. Part of that is because of the higher fees that stock pickers charge, which serve as a drag on performance. But another key element is the notion that markets are by and large efficient. And it’s very difficult for a lone stock picker to consistently outsmart an efficiently priced market.

Today, as indexing has transformed from a niche strategy to a widely embraced one — more than a third of the money invested in stock funds is currently pegged to a benchmark, thanks in part to the rise of exchange-traded funds — new questions about indexing are emerging.

Namely, if a plurality of investors switch from being inquisitive analysts digging for the truth about the long-term prospects of companies and instead throw up their hands and index, won’t the market become less efficient over time? Who would be left to sort the good stocks from the bad ones, so index investors don’t need to worry about it? And if that’s the case, won’t active managers start to gain an upper hand again?

Index investors often disparage active stock pickers for failing to “beat the market.” But this criticism gives active managers short shrift. The so-called market that portfolio managers can’t beat is made up of other active managers. It’s not necessarily that stock pickers aren’t good at what they do. It may be that the competition is so fierce that no particular active manager can consistently beat the consensus of his or her peers.

But as more and more of the world’s investors turn their back on stock picking and become indexers, that competition becomes less fierce.

This isn’t just an academic debate. This topic has grown sufficiently urgent that Vanguard, creator of the first retail index fund and one of the largest mutual fund companies in the world, saw fit to publish a response.

As far as theory goes, the notion that indexing’s popularity could one day alter the long-standing dynamics of the stock market isn’t totally crazy, notes Vanguard senior investment analyst Chris Philips. “It’s been an interesting intellectual debate,” Philips says. But he’s quick to add: “I don’t know if you can quantify if there is or will be a tipping point.”

One thing Vanguard is adamant about is that we haven’t reached such a point yet. While more than a third of mutual fund and ETF assets today are indexed, Vanguard asserts that a far smaller fraction of the overall stock market is in benchmark-tracking strategies.

While some institutions like pension funds use indexing strategies outside of mutual funds, even accounting for these holdings, Vanguard estimates only about 14% of money invested in the stock market is invested in index funds.

What’s more, if index funds were really driving a critical mass of portfolio managers from the market, the lessened competition would mean the remaining portfolio managers should do better. That hasn’t happened. Last year about 46% of active managers beat the market, according to Vanguard’s tally. (If you flipped a coin half would beat it in any given year.) That was up from about 30% in 2012, but about equal with the number that be beat the market in 1999.

This doesn’t mean the phenomenon couldn’t take place at some point in the future. But even if it did, presumably more would-be stock jockeys would try their hand at attempting to beat the market at that point, which would make the trick difficult again.

Vanguard’s Philips is skeptical that index investing will become popular enough to make that happen, at least not for a long time. “I’d be surprised if passive gets about 50% market share,” he says. That’s because Wall Street needs to make money and index funds are too tough a way to accomplish that.

“There is always going to be the search for an edge,” he says. “There just is not a lot of money in offering an index fund.”

MONEY Markets

The Real Reason You Should Care About Insider Trading

Martha Stewart leaving court after conviction
Businesswoman Martha Stewart, 62 leaves federal court in New York City on March 5, 2004. Stewart was found guilty on all counts over a suspicious stock sale. Jeff Christensen—Reuters

A new study suggests insider trading is even more rampant than anyone thought. But it's not so obvious why individuals should be concerned.

Between Michael Lewis’s takedown of high-frequency traders in Flash Boys and a new study finding that one in four M&A deals are preceded by insider trading, Wall Street’s public image is looking more “sell” than “buy” these days.

But how much does insider trading actually harm the average Joe? Even if Gordon Gekkos are running amok, do cheaters pose a real threat to those who play by the rules? The answer might surprise you.

1. Insider trading won’t hurt you if you don’t trade. Just like front-running high-frequency traders, those who trade on secret information are unlikely to hurt the portfolios of buy-and-hold investors, says Rick Ferri, founder of Portfolio Solutions.

In theory, an individual who frequently trades could be unlucky and end up buying or selling just as market-riggers are doing the opposite. But holding a diversified portfolio of stocks over long periods of time dilutes that damage; if you hold an index fund for a decade, you’d likely lose no more than pennies from trading inequities, says Ferri. “Getting upset about insider trading is like getting upset about the NFL draft,” says Ferri. “It makes for juicy headlines, but unless you’re a professional, it’s not really going to affect you.”

2. Insider trading could even help you. The presence of cheaters in the market could, coincidentally, benefit uninformed investors who just happen to land on the right side of a trade, says Santa Clara University finance professor Meir Statman, who has studied investor perceptions of insider trading. Let’s say you need to sell a stock in a company to free up cash, says Statman: If that happens to coincide with an insider trading-driven run-up before the company announces a merger or acquisition, you could actually win out.

3. Nevertheless, these cheaters are destroying the American Dream. Pundits have used the points above to argue that insider trading should be legalized. But the so-called “victimless crime” claims at least one victim, says Statman: confidence in the market. “A belief in fair play is part of good American culture,” says Statman. “The stock market is supposed to be an emblem of the American Dream: the belief that if you work hard and do your research, you’ll be rewarded. It’s not supposed to feel like the lottery.”

In his research, Statman has found that people living in economies riddled with more corruption, like India and Italy, are twice as likely as Americans to deem insider trading acceptable.

insider
Meir Statman, “Is It Fair? Perceptions of Fair Investment Behavior across Countries,” Journal of Investment Consulting, 2011.

There are a few key takeaways: If we want to keep our markets fair, it’s important that cheaters are caught and punished. But news headlines shouldn’t prevent you from investing, as long as you do it wisely — with diversified index funds and minimal trading. “Trading is like going into the jungle,” says Statman.

“There will always be beasts who are larger than you and thus able to devour you,” he says. “So go in as rarely as possible.”

MONEY Ask the Expert

What’s the Right Way to Expand My Portfolio In My 20s?

A financial pro gives a young investor some advice on the smartest ways to gain exposure to the market.

Q: I am in my early 20s and am looking to expand my investment portfolio. I currently have a small 401(k) and an S&P 500 index fund. Should I keep building up my index fund or start diversifying into something with a higher return potential? — Caroline, California

A: Participating in a 401(k) and investing in an S&P 500 index fund are a good start in your early 20s, notes Jim Ludwick, president of MainStreet Financial Planning.

Index funds — which simply buy and hold all the stocks in a market index such as the S&P 500 — aren’t as flashy as actively managed portfolios, where stock pickers can choose only those shares that they think are promising. However, index funds are a simple and inexpensive way to gain exposure to the market.

And there are years, depending on the market, where they can produce some sizeable gains. For instance, in 2013, the Vanguard 500 index fund, which tracks the S&P 500 index, returned more than 32%. That’s around three times the long-term average annual gain for stocks.

However, index funds are only as diverse as the market they track. So a good way to expand at this point would be to invest in other index funds that go beyond the S&P 500 index of U.S. blue chip stocks. An index fund that tracks the Russell 2000 index, for example, would give you exposure to shares of faster-growing small U.S. companies which your existing portfolio lacks.

You can add a Russell 2000 index fund to your mix to complement the S&P 500 fund, which gives you exposure just to large domestic companies.

Or for simplicity, you could trade in your S&P 500 fund for a so-called total market index fund, which in a single portfolio gives exposure to both large and small U.S. firms. “Expanding into a whole market index,” Ludwick notes, “is a very effective way to do it.”

Ludwick further highlighted the importance of investing in overseas markets for those seeking to expand and diversify. He noted that the Vanguard FTSE All-World ex.-U.S. ETF (ticker: VEU), which tracks stock markets outside the U.S., would be a good, low-cost complement to your U.S. holdings.

When investing in index funds, it’s important to comparison shop among vendors — Vanguard, Fidelity, Charles Schwab, iShares, SPDR all offer index products — for fees. Keep in mind that the expenses you pay are deducted from the market returns the fund generates, so the less a fund charges in fees, the more of its returns you get to keep.

Beyond index funds, you could branch out into actively managed portfolios. Studies have shown that over the long run, the majority of actively managed funds trail the basic indexes. Ludwick says active management is effective only in niche markets. That’s where the “insight really pays off,” he says.

However, as with all funds, the lower you can keep the fees, the better off you’re likely to be in the long run.

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