Don't miss out on the next buying opportunity
By Don Kuehn
In October, the Dow Jones Industrial Average returned to levels above 10,000. While still far below the previous all-time high for the index, it is a stunning recovery (almost 53 percent) from the lows set in March 2009.
This may be cause for celebration for those who stayed the course and remained fully invested in the markets during the wrenching months of declines. But for the people who tried to “cut their losses” and bailed out of stocks, it was a missed opportunity: the chance to make up for lost ground and rebuild their retirement, home buying or college funds.
Hey, I’m talking to you! Act now to be sure you don’t miss out on the next buying opportunity.
I know most readers don’t follow the markets every day. When a news story about the Dow or the S&P comes across the TV or radio it may sound like elevator music to your ears, or like Charlie Brown’s teacher in the Peanuts cartoons (whaaa, whaaa, whaaaaaa). So I’m here to tell you that there is no perfect time to act, but this is as good as any.
Let’s assume your plans do not include working until the day before you die. At some point, you are going to have to come to grips with the need to build a significant retirement portfolio. That means the stock market—whether you like the idea or not.
Intimidating? Well, maybe. But not insurmountable. Millions of people have overcome their fears and ignored the myths of stock investing. They have developed a real knack for putting away small amounts every month toward their goals and parlaying those investments into six- and seven-figure nest eggs.
In the last issue, I suggested that this might be the time to consider getting back into the markets (or dipping your toe into the waters of mutual fund investing for the first time) through dollar-cost averaging, where you invest a set amount of cash at regular intervals whether the markets are up or down. The result is that you buy more shares when prices are low and fewer when they are higher, but you avoid sinking all of your reserves into the market during volatile times when a sharp dip or correction could set you back yet again.
The opposite also holds true. If you want to get out of a position you think is overvalued, you can sell a set portion of your holdings at regular intervals until you have averaged your way out, or trimmed your holdings to a more acceptable level.
Dollar-cost averaging is a well-regarded strategy that experts have advocated for years. And the choices in which you can invest are virtually unlimited. If you are conservative, you can stick to dividend-paying stock funds, balanced funds or target-date funds that take the guesswork out of asset allocation.
Willing to take on a bit more risk? Go with stock index funds that track the movement of the overall market or of sectors within the market. If you see the future in foreign markets and emerging countries, you can put a portion of your investments there. In fact, the way you allocate your assets is one of the major factors in how well your portfolio will perform.
If you are willing to devote as much time to educating yourself about mutual fund investing as you did shopping for your last car, you can arm yourself with plenty of knowledge to be a successful investor.
Here are a few key terms you should master: asset allocation; expense ratios; index funds; large-, mid- and small-cap funds; sector funds; fees and loads; no-load funds; x-dividend date; P/E ratios; standard of deviation; beta and risk.
After getting comfortable with the notion of investing, there’s nothing that focuses your mind quite like having some of your own money at risk. So get started.
If you have been an investor in the past and are now gun-shy about getting back into active investing, take heart. Over time (I can’t say how much time), American stock markets go up. While the recovery since last March has been fast and nearly unprecedented in its velocity, there are no guarantees about how much higher, or how fast, the markets will continue to rise.
So be careful, and consider these points:
- Don’t go “all in” while the markets are so unsettled. Take the money you have set aside, add the amount you are committed to investing over the next year and dollar-cost average one-twelfth of that total into the funds of your choice each month.
- You can’t make up for two years of losses in a short time, so be realistic. If your portfolio is still down 32 percent from the peak, do the math: You’ll have to earn over 47 percent more just to get back to even. So watch for the funds’ beta (their relationship to a relevant index) and the standard of deviation (how much the funds you are watching are likely to vary from their averages, i.e., volatility) and choose funds that will get you to your goals with the least amount of risk.
- Get out of cash. Sure the old saying “cash is king” applies to some things (like buying at retail), but as an investor in today’s markets, cash is actually losing value because interest rates are so low. If you have $10,000 in the average money market fund today it’s earning about one-half of 1 percent. That’s $5 a year! By the time you pay taxes and factor inflation into that, you will have actually lost money on your investment.
- Increase the amount you invest each month. In spite of the very difficult times many Americans are having just keeping their heads above water, the only sure-fire way to make up for past losses is to increase the amount you invest each month. If you are contributing to a 403(b) plan at work, or if your spouse is eligible to participate in a 401(k) plan, you can bump your contribution by 2 percent and increase your nest egg over the next 30 years by almost 40 percent!
Here’s how: If you earn $50,000 per year, get annual raises of 3 percent, and contribute 5 percent of that to a 403(b) or 401(k) plan that earns 6 percent per year, you should have $260,500 after 30 years. Increase your contribution to 7 percent and your balance after thirty years should be $364,000.
And because your contributions are before taxes, the impact on your take-home pay is just a few dollars a week.
- Nothing affects the performance of your investments like expenses. Keep a sharp eye on the management fees and operating expenses of every fund you are considering (in my personal investments, an expense ratio of more than 1 percent is a nonstarter no matter how good the past returns or future prospects of the fund may be—no exceptions). There are plenty of comparable funds to choose from, so you don’t have to pay high expenses, loads or 12-b1 fees to get a good return. Investment returns may go up or down, but expense ratios are “the gift that keeps on giving”—to the fund managers.
- Figure out how much retirement will cost. You can’t know whether you are on the road toward a comfortable retirement unless you know how much money you are going to need to pay your bills and meet your needs after the paychecks stop. Take time to work through your future needs by using one of the many retirement planning programs available online (fidelity.com, troweprice.com and vanguard.com, to name just three).
- If you think this is all way too complicated and you need a financial planner to help you make choices and decisions, I have written previously about selecting a fee-only financial planner (see: /newspubs/periodicals/yourmoney/index.cfm—February 2001 parts 1 and 2) or you can go to the National Association of Personal Financial Advisors (www.napfa.com) to find a planner in your area.
Planners make their living in one of three ways: commissions on what they sell, fees charged to the client or a combination of the two. With commission-based planners, there is always the lingering suspicion that certain investments are being recommended as a way to win a sales contest or to generate the greatest income for the planner. For my money—and it is my money— fee-only is the way to go.
Even among fee-only planners, you have options. You might agree to an hourly rate, a flat rate for the planning work to be done, or a fee based on a percentage of the value of the assets in your portfolio. Not all certified financial planners work the same way, so be sure you understand how you will be charged.
After you figure out how much money you will need at retirement, how many years you expect to live on your assets after retiring and what other income you can expect after you stop working (such as Social Security or state retirement funds or 403(b) accounts) you can determine how much of your portfolio should be invested in stocks, bonds and money funds. Generally, the younger you are, the greater your exposure to stocks should be. But not everyone of the same age shares the same family or personal circumstances or is comfortable taking on the same amount of risk.
Bottom line? Ready or not, retirement (voluntary or involuntary) is going to become a reality at some time in your life. Whether you will approach it with eagerness or dread depends on the decisions you make today. It’s your money, and only you can decide what investment strategies will work for you.
Don Kuehn is a retired AFT senior national representative. For specific advice relative to your personal situation, consult competent legal, tax or financial counsel. Comments and questions can be sent to email@example.com.