The past “decade to forget” of zero sum market returns (2000- 2010) which lead up to the roller coaster market volatility of 2011 and bleak economic and global financial forecasts has many investors fearful that their retirement plans are going up in smoke. Every time you turn on the TV, the chicken- little news reporters are hyping up the stock market swings like an approaching hurricane yet not providing any real-time advice on how to save, invest, grow or protect your money. It is easy to understand why most people would rather spend their money today than save more dollars from each paycheck to their 401K plan or stay invested to protect their retirement goals.
There is no silver bullet to beat the market. Much about market intelligence and personal investing has more to do with behavioral finance, asset allocation and long term strategy than taking action on short term market information. Matter of fact, to have the potential to make money you typically have to be willing to lose money. Investors that say that they want to grow their money in the market – but “don’t want to take any risk” are not being realistic.
If you want zero risk invest in a larger mattress or a CD. The only opportunity cost to investing in a CD, is that you may guarantee yourself not to meet your long term goals and keep up with the cost of living in retirement. By incorporating an unemotional, disciplined and consistent investment strategy to your money, you may achieve better long term results in the market and perhaps sleep better at night. Expect the unexpected, invest for the long term and don’t get wound up with the news. If you live in Florida you would expect hurricane or if you live up north you would expect a snowstorm. The following are five tips that can keep you on track to invest like a pro and work toward meeting or maintaining your retirement goals.
1. Dollar Cost Average (DCA) . If you are systematically saving for your retirement inside or outside a qualified retirement plan, dollar cost averaging may help to eliminate the risk of timing the market and forces you to have a long term approach to your money. Buy on the Bears and the Bulls. In the end your average price per share may be lower if you follow this strategy. If you have a lump sum to invest, consider to DCA into the market over a 6 month or 12 month period of time in equal increments. Even rebalancing your portfolio is a form of DCA (such as carving off a piece of your portfolio that is up and buying an asset class that is down.) Dollar cost averaging involves continuous investment in securities regardless of fluctuation in price levels of such securities. You should consider your ability to continue purchasing through fluctuation price levels. DCA does not assure a profit and does not protect against loss in declining markets. 2. Don’t time the market. When you time the market you need to make two significant decisions (when to sell and then when to buy back in.) Most investors cannot get one of those decisions correct otherwise both. Over the past five decades there have been 10 market crashes (or about one every 6 years.) Dalbar studies have indicated that while the market index returns (Dow Jones) has trended at approximately 10% over many years, the average investor has returned only 2%, mostly due to selling on emotion and following the flock. In the end, markets are rational and efficient, investors are not. Markets are fantastic as they create a level playing field and only you can decide if you are following the wisdom of the crowd or madness of the crowd. 3. Diversify your portfolio. A portfolio designed with an asset allocation that matches your specific goals, time frame and risk tolerance as well as is diversified across all major asset classes can greatly mute your portfolio volatility and help to reduce your downside capture potential. By also tactically investing small percentages of your portfolio in alternative investments you can create a market hedge through investments not correlated to the Dow. On market upswings, history has shown that approximately two-third, or 75%, of stocks have followed the general trend of the market.
This simply supports the popular Wall Street adage, “don’t confuse brains with a bull market.” In other words it is easy to make money when the market is going up, but it is more challenging to lose less money when the market is going down. With future changes or increases in interest rates, inflation and taxes, taking a more sophisticated and tactical approach to portfolio design may help you to better weather the storm than a buy and hold investor. Now is not the time to have a set it and forget it approach. Of course, there is no guarantee that a diversified portfolio will enhance overall returns or outperform a non -diversified portfolio. Diversification does not protect against market risk.
4. Don’t overpay in expenses. There are two common expenses investors face whether investing in or outside their 401(k). One is from the mutual fund investment expenses or 12B-1 Fee’s which can average about 1% per year of a fund’s net assets. 12B-1 fee’s are an annual marketing or distribution fee on a mutual fund. The fee is considered an operational expense and, as such, is included in a fund’s expense ratio. Even no-load and index funds have an annual fund expense fee, but typically quite less than their retail counterpart. Do not incorporate a new investment strategy into your portfolio based on cost alone.
The second most common investment expense is found while investing in an annual on-going ‘fee based’ product such as a 401(k) account, an advisory ‘wrap’ account or even in a variable annuity. Many of these products charge approximately 1% per year with up to 3% on the high end. Also beware that some products may have liquidity issues and may only allow you to access your money by paying an additional surrender charge – which is yet another fee. Make every effort possible to control your investment expenses. If you are paying 3% per year in total fee’s and only returning 5% per year and are in the 20% tax bracket, you really are just breaking even and not even keeping up with inflation for the risk you may be taking.
5. Don’t consult yourself. If you want to invest like a pro, hire a pro. Still, with all the negative news on financial advisors and stock brokers in the news, it can be disconcerting if not counterintuitive to trust someone with your money. Many investors are so upset with the market and the financial services industry in general, that they feel it would be better to do it themselves. Don’t assume that because you have been reading books and financial magazines that your ability and expertise to manage your nest egg to save yourself from paying an advisory fee will substitute for the sage- advice of an experienced and accredited wealth advisor.
In the end, you really don’t know what you don’t know. Like going to Vegas, some people can pick a good stock or good fund some of the time, but most people cannot design and manage a portfolio consistently over the long run. Just remember that you get what you pay for. It is not wise to gamble with your retirement.
Having a 2nd pair of eyes with a more objective approach and a high level of expertise in both wealth management and financial planning may help you to “stay the course” in an effort to meet your long term goals and dreams. Choosing a financial planner may be one of the most important decisions you make for yourself and your loved ones. Consider to form an on-going relationship with an experienced advisor that holds a nationally recognized designation, such as one from a CERTIFIED FINANCIAL PLANNER™ practitioner (CFP®). A CFP® commits to uphold a high fiduciary standard to put their client’s best interest first at all times. For more information on this article please contact [email protected] or visit ulinfinancial.com.
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Disclosure:
Stock investing involves risk including loss of principal. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
Investing in mutual funds and variable annuities involves market risk, including possible loss of principal. Variable Annuities are suitable for long-term investing, such as retirement investing. Withdrawals prior to age 59 ½ may be subject to tax penalties and surrender charges may apply.
Investors should consider the investment objectives, risks, charges and expenses of any investment carefully before investing. The prospectus contains this and other important information about the investment. You can obtain a prospectus from your financial representative. Read carefully before investing.
Jon Ulin is a registered representative with, and securities offered through, LPL Financial, Member FINRA/SIPC. Investment advice offered through Independent Financial Partners, a Registered Investment Advisor and separate entity from LPL Financial.