2016 was another great year for equity investors.
And with inflation, interest rates and energy prices low, the economy picking up steam, and President-elect Trump set to sign new pro-business legislation into law, 2017 could turn out to 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 2016 Retirement Confidence Survey revealed that millions of Americans are woefully unprepared for retirement. The single biggest reason is they haven’t saved enough.
More than a quarter of Americans (26%) have put aside less than $1,000 for retirement, and 42% have saved less than $10,000. The majority (58%) has 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 the government will deliver the material happiness they deserve, sparing them the trouble and discomfort of striving.
Unfortunately, the average retired worker receives just $1,341 a month from Social Security. (If you include spousal benefits, it climbs to $2,212.)
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, three out of four 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. For example, 10-year Treasurys currently pay 2.4%. 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 seven 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.
Rebalancing doesn’t just mean moving out of high-performing stocks into low-performing bonds. Over the last several years, international markets – and particularly emerging markets – have delivered much lower returns than domestic equities.
Yet history tells us that will not always be the case. Foreign markets often generate much higher returns than our own market. And if the greenback gives up some of the dramatic gains of the last few years, your dollar-based returns will be higher still.
So fight the urge to keep riding U.S. stocks higher and spread 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.
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Source: Investment U