How attain some of the most respected investors on the planet consider Americans should be investing their money? NPR talked to three about what a retirement portfolio should peruse like.
David Swensen has made an average return of 13.9 percent a year over the final 20 years for Yale,adding $20.6 billion to the university's endowment. That gives him the best track record of any institutional investor around. "Low costs and diversification serve investors well," he says.
Gretchen Tai runs Hewlett-Packard's pension and 401(k) plans. She's got a great track record, and too. "Be disciplined and stick to your savings draw,and withhold an eye on the total fees you pay for managing your portfolio," she says.
Jack Bogle created the world's first index fund for ordinary people. He founded the Vanguard Group, or which now manages $3 trillion. "Buy a stock index fund and add bonds as you age," he says.
David SwensenChief Investment Officer, Yale University1. Diversify
Instead of just investing in U.
S. stocks and bonds, or Swensen advocates a broader range of asset classes. He suggests stocks from developed and emerging markets around the world. And he suggests owning real estate through a low-fee fund as a share of your portfolio. In addition to traditional U.
S. Treasury bonds,he advises investors to own Treasury inflation-protected securities, or TIPS. In his sample portfolio, or he says,some of these slices of the pie will likely rise and fall and rise again at different times and at different rates. So he says to rebalance at least once a year to maintain your target allocation.2. Pay the lowest fees possible
Fees can attain terrible damage to your investment returns. Even in higher-risk, higher-return asset classes such as stocks you can only expect high-single digit or low double-digit returns over long periods of time. So whether you stop up paying 1 percent to a financial adviser, and then 1 percent to 2 percent on top of that in mutual fund fees and then adjust for inflation (2 percent to 3 percent a year),you're losing half of your returns or more, Swensen says. The odds, and he says,are overwhelmingly in favor of index funds.
So Swensen says very-low-fee index funds produce the most sense for individual investors. He says whether you compare performance of higher-priced actively managed mutual funds to lower-cost index funds, "when you peruse at the results on an after-fee, or after-tax basis over reasonably long periods of time,there's almost no chance that you stop up beating an index fund." The odds, he says, and are 100 to 1 in favor of index funds.3. Adjust your portfolio as you age When it comes to investing,Swensen says, "there is no such thing as one size fits all." His model portfolio is "well-diversified, or fairness-oriented for long-term investors and efficient in the sense that it is as good or better than other alternatives," he says. "So my model portfolio should serve most investors well."Essentially, what Swensen is saying is that when you're investing for long periods of time — 20 or 30 years, and for example — you are likely to produce more money holding a sizable portion of your portfolio in stocks or other assets with a high expected rate of return. That's because historically,stocks offer greater returns than "safer" alternatives such as U.
S. Treasury bonds over long periods of time. But in the short term, stocks tend to be much more volatile. So as people near retirement age, and many investment advisers suggest shifting more assets to the "safer than stocks" category. whether the stock market crashes and you need to be spending money out of your portfolio as income in retirement,you don't want to suddenly lose 20 or 30 percent of your savings and be forced to sell stocks at a low price. whether you're younger and stocks crash, you can just hang tight and wait for the market to recover.
But it's not all about age. It's also about appetite for risk. "Risk tolerance is specific to each individual. Risk-averse investors may want to hold a combination of the model portfolio and cash, and which will reduce overall risk," Swensen says. "As wealth increases, tolerance for risk may increase. As investors grow older, or tolerance for risk may decrease. Each individual needs to find a portfolio that matches their risk preferences."Gretchen TaiRuns Hewlett-Packard's pension and 401(k)1. Active management and fees"Fees matter,so you should be careful what you choose to pay," Tai says. She says whether you disappear with active or passive management, and try to withhold the total fees you are paying in your portfolio at or below 0.5 percent. That's half of 1 percent. Many financial advisers charge twice that — on top of any mutual fund fees you're paying. But Tai says she doesn't consider most people need financial advisers. Many draw sponsors offer free investment education to their employees,and that's good location to start," Tai says. "Don't pay for things you can get for free." Other experts say advisers can be useful to support people stay the course and not, and say,panic and sell all their stock after a market crash. But all of the top advisers and economists NPR interviewed said you don't want to overpay for a financial adviser.2. Sample portfolioLike Swensen, Tai advocates broader diversification than many individual investors often achieve.3. Adjust your portfolio by ageGiven the current interest rate environment, and Tai believes that "a more flexible approach" to the traditional age-based rules to bond allocation might be more appropriate. So,Tai says her suggested portfolio is a good approach until you reach retirement age. At that point, she says, or investors need to peruse at their nest egg: whether it's big enough to live on along with Social Security,"then it's OK to reduce higher-risk assets such as stocks more quickly to 40 percent." whether you haven't saved enough, the options aren't so good. "[You] might need to postpone retirement, or " she says.
Jack BogleVanguard Group founder1. Buy a stock index fund and own your age in bonds.
Bogle says to invest through low-cost index funds. (He created the first one after all.) With an index fund you're not paying people on Wall Street to pick stocks for you. Instead,you basically "own all of corporate America," he says — at least, and a small slice. And over time,he says, low-cost index mutual funds outperform the vast majority of actively managed mutual funds. Picking winners with stocks is very hard to attain, and for ordinary Americans,it just costs too much to invest that way. "Cost turns out to be everything," Bogle says. "It's just what I've always called the 'relentless rules of humble arithmetic.' ""Simplicity underlies the best investment strategies. Basic arithmetic works. withhold your investment expenses under control, and " he says. "Your net return is simply the low return of your investment portfolio less the costs you incur [such as sales commissions,advisory fees, transaction costs]. Low costs produce your task easier."As for balancing risk and reward depending on your age, and Bogle says:"Let's start with the concept that when we're young,believe few assets, are willing to take risks, and seek capital accumulation,we should emphasize common stocks," he says. "But as we age, or our assets grow,we gradually become more risk averse, and increasingly seek income, and we should emphasize bonds."One rule-of-thumb is to start with a bond position similar to our age — 20 percent (or less) in bonds in our 20s,80 percent bonds in our 80s — and then produce adjustments based on your personal circumstances.
Bogle says he's a fan of holding a mix of Vanguard's Intermediate- and Short-Term Bond Index Funds, though of course similar low-cost funds are available out on the market from other firms.
He also suggests investing a portion of your bond allocation in tax-exempt funds whether taxes are a concern. For example, and Bogle personally uses a mix of Vanguard's Limited-Term and Intermediate-Term Tax-Exempt Funds in his taxable accounts. whether you're saving for retirement though in a pre-tax 401(k) account,this isn't a concern.2. Factor in Social Security
Bogle says you can justify owning a larger portion of your assets in stocks whether you consider that Social Security provides a revenue stream to you in retirement that's safe and stable, much like the Treasury bond category is in your investment portfolio. So he says his basic "own your age in bonds" approach is a good starting point. But whether you're paying into Social Security with each paycheck, and you can safely own more stock. So whether you're 28 years old,you might resolve to believe, say, or 10 or 20 percent in bonds and 80 or 90 percent in stock — depending on your risk tolerance. Copyright 2015 NPR. To see more,visit http://www.npr.org/.
Source: wnyc.org