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Simple, solid strategies for investing money

MUTUAL FUND QUARTERLY REPORT

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

That preserves the big tax break that stocks enjoy over bonds and bank accounts. Interest income will continue to be taxed at ordinary tax rates, which can be more than double the 15% capital gains and dividend rate.

For older investors who are focused on generating income from their portfolios, stocks or stock funds that pay rising dividends have two huge advantages over bonds. One is the tax break. The other is that dividends can increase over time, while interest on an individual bond is fixed for the life of the security.

Rising dividends "are a tool for fighting inflation," said Russ Kinnel, director of mutual fund research at Morningstar in Chicago.

Many U.S. companies have been generous with dividend increases in the last two years. Regular dividend payments by the S&P 500 companies jumped 17% in 2012 to a record $281 billion, S&P said. Imagine getting a 17% pay hike.

"With low tax rates, companies are going to be encouraged to pay more in dividends," said Tom Roseen, senior analyst at mutual fund tracker Lipper Inc. in Denver. Unless corporate earnings collapse, the dividend story has legs.

If you don't have the wherewithal or desire to own individual stocks, exchange-traded funds that focus on dividend-paying stocks are a good diversified alternative.

Of course, stocks and stock funds also carry the risk of much greater principal loss than most bonds. And dividends can be cut. But for long-term investors who can shoulder some risk, the tax advantage of dividends over interest — at a time of record low interest rates — should be a big draw.

Fight back against fees. Investors have heard this one forever, and for good reason. Every penny that Wall Street takes from you in fees reduces your investment returns.

The best strategy on investment fees goes by the acronym AMJ: Avoid, minimize or justify.

You may be able to avoid some fees entirely — for example, the so-called 12b-1 fee that some mutual funds charge to pay for fund marketing expenses or broker commissions, or both. The fee can take up to 1% a year of a fund's assets. A simple strategy: Avoid funds with high 12b-1 fees in favor of equivalent funds with low or no such fees.

The Financial Industry Regulatory Authority offers a handy online calculator for comparing fund fees.

Minimizing mutual fund fees in general is an exercise many Americans have taken seriously in the last decade. The proof is in the cash flows into and out of the fund industry.

Vanguard Group, the pioneer of low-cost "index" mutual funds that track broad or narrow market swaths, has had the largest net cash inflows of all fund companies in four of the last five years.

Another sign of investors' embrace of low-fee funds: the explosion of exchange-traded funds. Like index mutual funds, ETFs are designed to track the performance of stock and bond market sectors. But these securities trade on stock exchanges, and their management fees typically are minimal (though you pay a commission to buy or sell them).

Total ETF assets have rocketed to $1.3 trillion, from $301 billion in 2005. Although traders love them, the funds also make great low-cost portfolio building blocks for long-term investors.

Some investment fees are unavoidable. The key for investors is to weigh fees against the value of what's provided. In other words, make sure the fees you're paying are justified.

You wouldn't expect a good financial planner to work for free. Likewise, if you own a mutual fund that charges above-average management fees but whose performance also is above average, that fee may be justifiable.

Fund fee levels in 401(k) accounts were supposed to become much easier to compare last year with new Department of Labor rules mandating more disclosure to plan participants. Some industry experts say the disclosures fall short. But it's a starting point.

Strive to be a "value" investor. Consumers always are eager to talk about the great deal they got on a car, a TV, a refrigerator, etc. They'd do themselves a big favor by applying the same mentality to financial markets.

The old Wall Street adage is that stocks are among the few things that people shun as prices drop. If the cost of a Mercedes-Benz SL550 were to suddenly plunge 30%, it's a good bet there would be a lot more buyers. But as the stock market dropped 50% from August 2008 to March 2009, a huge number of Americans vowed never to own stocks again.

As it turned out, March 2009 was the buying opportunity of a lifetime. The S&P 500 is up 118% since then.

Depressed assets are the natural haunt of value seekers. Steven Romick, a veteran value investor who manages the First Pacific Advisors Crescent Fund in Los Angeles, said he analyzes stocks, bonds and other assets to gauge the potential payoff from current price levels compared with the risk of loss.

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