Three Simple Steps to Higher Returns This Year
2017 was a great year for equity investors. And 2018 may well be another.
Then again... financial markets offer no guarantees.
However, there are three steps you can take now - today - to earn higher returns this year no matter what the markets do.
1. Save More
The 2017 Retirement Confidence Survey revealed that millions of Americans are woefully unprepared for retirement. The single biggest reason is they haven’t saved enough.
Almost a quarter of Americans (24%) have put aside less than $1,000 for retirement. And nearly half have accumulated less than $25,000.
I’ve been an avid saver since I was an indigent young man in my 20s. I drove a beater car. (The stereo was worth more than the vehicle.) I shared an apartment with friends. I had no health insurance. I had no employer-sponsored retirement plan.
But I saved. Frankly, I was terrified of what might happen if I didn’t.
Yet millions of Americans today believe that government will deliver the material happiness they deserve, sparing them the trouble and discomfort of striving.
Unfortunately, the average retired worker receives just $1,360 a month from Social Security. (If you include spousal benefits, it climbs to $2,069.)
To ensure a comfortable retirement, save as much as you can, for as long as you can, starting as soon as you can.
Unlike the performance of the stock and bond markets, saving is under your control.
2. Cut Your Investment Costs
In most walks of life, you get what you pay for. This is emphatically not the case when it comes to investment managers.
Every year, 3 out of 4 active fund managers fail to outperform an unmanaged benchmark. Over periods of a decade or more, more than 95% of them fail.
Do you really want to pay hefty fees to someone with less than a 1 in 20 chance of delivering the goods?
Investment fees and returns are inversely correlated. The more your advisor makes, the less you do.
This is particularly true in the fixed income area. Ten-year Treasurys currently pay 2.4%, for example. If you plunk for a bond fund with a 1% expense ratio, the fund is taking 42% of your return.
That makes no sense. The goal is for you to get rich... not your broker or advisor.
3. Rebalance Your Portfolio
The U.S. stock market has made a remarkable run since it bottomed nearly nine years ago. That means you may now have more in stocks than you’d be comfortable with in a serious market downturn.
So rebalance your portfolio.
Rebalancing means you sell back those asset classes that have appreciated the most and put the proceeds to work in asset classes that have lagged the most.
This is a contrarian exercise. And it has one major salutary effect: It forces you to sell high and buy low. This adds to your long-term returns while reducing your risk.
Yes, I often tell traders to hang on to their winners and cut their losers short. But there’s a big difference between trading individual securities and rebalancing your portfolio.
When it comes to asset allocation, you flip the script and sell the assets that have surged and buy the laggards. When the cycle turns - as it will eventually - you’ll be glad you did.
Good investing (and happy New Year),
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