- The U.S. stock market just finished a record year, but the future holds no guarantees.
- Today, Alexander Green offers three simple things you can do to ensure you continue to grow your wealth in 2020, no matter what the market does.
2019 was an excellent year for equity investors.
The S&P 500 returned 30.4%, and many of our Oxford Club investment portfolios did considerably better.
2020 may be another great year. (I’ll have more to say on that subject in Monday’s column.)
Then again… financial markets offer no guarantees.
However, there are three steps you can take now – starting today – to earn higher returns this year no matter what the market does.
No. 1: Save more.
The 2019 Retirement Confidence Survey revealed that millions of Americans are woefully unprepared for retirement. The single biggest reason is they haven’t saved enough.
Forty-one percent of workers are “not too” or “not at all” confident that they will have enough money for medical expenses in retirement.
Almost a quarter of Americans 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.
It wasn’t easy. 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 the government will deliver the material happiness they deserve, sparing them the trouble and discomfort of striving.
However, the average retired worker receives just $1,470 a month from Social Security. (If you include spousal benefits, it climbs to $2,200.46.)
No one lives high on that kind of income given today’s cost of living.
To ensure a comfortable retirement, you should save as much as you reasonably can, for as long as you can, starting as soon as you can.
And, unlike the performance of the stock and bond markets, saving is under your control.
No. 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 underperform.
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.
Or, as Vanguard founder Jack Bogle put it, in the world of investing you get what you don’t pay for.
This is particularly true in the fixed income arena. Ten-year Treasurys currently yield 1.9%, for example. If you plunk for a bond fund with a 1% expense ratio, the fund will take more than half your annual income.
That makes no sense. The goal is for you to get rich… not your broker, manager or advisor.
No. 3: Rebalance your portfolio.
The U.S. stock market just finished the decade in record territory. The S&P 500 has registered a total return of 256% since the beginning of 2010.
That means you may now have more in equities 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 a 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 tell traders to hang on to their winners and cut their losers short.
But there is a big difference between short-term trading strategies and long-term growth strategies, between trading individual securities and rebalancing the asset classes that make up your portfolio.
When it comes to asset allocation, you flip the script and sell back the asset classes that have surged and use the proceeds to add to the laggards.
When the cycle turns – and the underperformers (like foreign stocks) become outperformers – you’ll be glad you did.
Good investing… and happy new year,