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Simple, solid strategies for investing money

The economic tumult of recent years doesn't mean investors need a complicated game plan. Here are four ways to boost the odds of long-term success.

January 12, 2013|By Tom Petruno
  (Keith Negley, For The Times )

Investing has been a massive exercise in frustration for millions of Americans over the last decade or so.

Two market crashes in 12 years drove many people away from equities. Now key U.S. stock market indexes are at or near record highs again, after a strong 2012 rally that has spilled into 2013.

The average domestic stock mutual fund rose 15% last year, the third annual gain in four years. Meanwhile, the hunger for perceived safety has driven interest rates on bonds and other fixed-income securities to record lows. It's a backdrop that seems to cry out for a complex, headache-inducing game plan.

But in fact, the best strategy for many people may be just the opposite: Focus on the basics. Mainly, keep sight of the things you can control to reduce your mental stress and improve your odds of long-term success.

Here are four strategies for keeping it simple:

Keep it balanced. You say you can't decide how to build and maintain a diversified portfolio? Then don't bother. Let someone else do it for you. That's the beauty of "balanced" mutual funds — portfolios that always own a mix of stocks and bonds.

A balanced or "allocation" fund is the simple, elegant solution for people who know they want to be in financial markets for the long haul but don't have the time or interest to devote to closely managing their nest eggs.

The basic idea is that the stock portion of a balanced fund provides long-term growth while the less-volatile bond portion provides regular interest income and a buffer against any plunge in stock prices. A typical mix is 60% big-name stocks, 40% bonds, but the mix varies depending on whether a fund follows a conservative, moderate or aggressive strategy.

Here's how it works in practice: In the 10 years ended Dec. 31, the average moderate-mix balanced fund gained 6.4% a year, according to investment research firm Morningstar Inc. That was only modestly less than the 7.1% average annual gain in the Standard & Poor's 500 stock index in that period.

But the balanced fund's return came with a lot less volatility, including much smaller losses than in the overall stock market in down years.

You could create a balanced portfolio of individual stock funds and bond funds on your own. But if your goal is to maintain a specific percentage of your portfolio in each type of asset, you'd need the discipline to "rebalance" each year by selling some portion of the funds that have done best and channeling that money into the funds that have performed worst.

"Buy low, sell high" always sounds easy, but psychologically it's very difficult. "What you're asking investors to do is really against their human intuition," said Fran Kinniry, a principal at Vanguard Group's investment strategy unit in Valley Forge, Pa.

A balanced fund makes that decision for you. And it keeps you in the stock market in periods when your instinct might be to flee — such as after the 2008 crash.

There are two types of balanced funds in most 401(k) retirement savings programs. One is the conventional balanced fund, including such hugely popular offerings as the Vanguard Wellington fund and American Balanced fund. These funds generally keep the stock-versus-bond ratios in a specific range, depending on where the manager believes there is better value.

The other type is the target-date retirement fund. You pick a target-date fund based on your expected retirement year, and the portfolio is automatically adjusted over time to gradually lower its stock assets and raise its bond assets. The goal is to lower the portfolio's risk and volatility as you age.

Lately, some investors may be worried less about the stock portion of their balanced fund than the bond portion. With bond yields at or near historic lows, a jump in market interest rates could devalue bonds.

That may happen eventually. But calling the turn is no easy feat.

"Just because the level of interest rates is low doesn't tell you about the direction of rates," Kinniry said. "Japan has had low rates for 25 years."

And if stocks pull back soon, high-quality bonds would be a logical refuge.

Get on the right side of the tax man, and stay there. This is the true no-brainer. Shelter as much wealth as you can from current taxes, allowing your nest egg to compound over time.

If you have access to a 401(k) or similar retirement savings plan, contribute as much as possible. If you don't at least max out any match from your company, you're leaving free money on the table.

If you're eligible and able to contribute to traditional individual retirement accounts and Roth IRAS, those too can be no-brainers.

Realistically, many people are limited in how much they can save. But the start of every year is the logical time to rethink your spending versus saving goals.

For investors, 2013 kicked off with good news from Washington: Congress kept the top tax rate on long-term capital gains and on dividends at 15% for most people.

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