Simple, solid strategies for investing money


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.


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.

Every value player learns that just because something has fallen doesn’t mean that it can’t drop further — or that it won’t stay stuck at a depressed price for a long time. A hallmark of value investing is patience.

One of Crescent Fund’s biggest holdings is Microsoft Corp. The shares have mostly traded between $25 and $32 since 2004. The company’s many critics say it has lost its way.

Romick, however, believes that Microsoft still has significant growth potential in areas such as cloud computing, its Xbox gaming unit and its Microsoft Office products. The stock “should be getting a re-rating, in my opinion,” he said. But if it doesn’t, he believes his risk of loss from current levels is low. And the stock’s current dividend yield is 3.4%.


Yet as he looks across financial markets, Romick said he doesn’t see a lot of screaming values to add to his $9.9-billion fund, which on average has gained 6.3% a year over the last five years, beating 95% of its peer funds. He’s holding 28% of the fund’s assets in cash, waiting for better opportunities in stocks or bonds.

The lesson here for average investors: If you’re happy with your investment mix, don’t feel that you have to change it. But have a plan. Make a list of the investments (funds, stocks, bonds, etc.) you’d like to add to your portfolio if prices fell.

Then promise yourself you’ll stick with that plan if and when prices do drop, assuming the basic appeal of the investments is intact.

The conventional wisdom is that compared with the big players, small investors are always at a disadvantage in the markets. One famed money manager, Jeremy Grantham of Grantham, Mayo, Van Otterloo & Co. in Boston, argues that the opposite is true.

In a client letter last year, Grantham wrote 10 success rules for individual investors. One emphasized the complete freedom that small investors have in building a nest egg, with only themselves to answer to.

When picking investments, “the individual is far better positioned to wait patiently for the right pitch while paying no regard to what others are doing, which is almost impossible for professionals,” he wrote.