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http://finance.yahoo.com/focus-retirement/article/113716/stop-t
Why You Should Stop Trying to Beat the Market
by Walter Updegrave
How much better will you do if you invest well instead of poorly (or earn
the average)? -- James McGrath, San Marcos, Calif.
More from CNNMoney.com:
• Ultimate Guide to Retirement
• What to Do With $1,000 Now
• How to Get Out of Debt Quickly
Considering all the attention investment pros (and financial magazines)
lavish on picking the right stocks and funds, I can understand why you might
think superior investing ranks above all else when it comes to a secure
future and a comfortable retirement.
Savvy investing is certainly important — you don't want to blow your
savings on lousy funds or ineffectual strategies. And you'll end up richer
if you happen upon a winning investment. If you'd owned the Sequoia Fund for
the past decade, for example, a $10,000 balance would have grown to more
than $16,000 now, vs. $12,800 if you'd simply earned the market return.
But as a practical matter you can't know in advance which fund or stock will
beat the market — in fact, over the past 15 years, only 55% of U.S. equity
funds did so, according to Morningstar. Rather than pinning your hopes on
higher returns, I'd say boosting your savings rate is a surer way to improve
your retirement prospects.
To see what I mean, check out this example. Let's say you're 35 years old,
earn $60,000 a year, and sock away 10% of your salary (including your
company match) into a 401(k) that's already worth $75,000. And assume you're
stashing your retirement moolah in a diversified portfolio of 60% stocks
and 40% bonds.
You're doing a reasonable, though not spectacular, job of preparing for
retirement. Your savings rate is decent, though it could be better. As for
investing, you're hardly a slouch, but ideally you should be devoting more
of your 401(k) to stocks.
The key is starting with an overall plan — that is, deciding on the
appropriate asset allocation, or blend of stock and bond funds that makes
sense given your age and stomach for risk.
Indeed, when the folks at T. Rowe Price ran the numbers on this saving and
investing regimen, they projected that you'd have a 68% chance of
accumulating enough money to retire in 30 years on 70% of your pre-
retirement income and not deplete your funds until age 92.
Not bad. But if you could do just one thing to improve your outlook, what
would it be? Save more or earn more?
You can't, of course, say you'd prefer an 8% annual return instead of 6% and
turn a dial higher to get it. The investing world doesn't work that way. So
to try to earn more you have to invest more aggressively.
In this example, both increasing your savings rate from 10% to 12% and
shifting to a more growth-oriented portfolio that's 80% stocks and 20% bonds
— an appropriate mix for a 35-year-old — will boost your chances of
retirement success. But saving more has a larger effect than earning a
higher return would.
In the real world you're not limited to one move. You can bump up the amount
you save and improve a sub par investing strategy. Do both those things —
which, ideally, you would — and you can feel even more confident about
achieving a secure retirement.
In theory, later in your career, when you're more likely to have a large
balance in your retirement accounts, a relatively modest increase in your
rate of return could boost the size of your nest egg more than upping your
savings rate would.
On a $500,000 portfolio, for example, an additional half percentage point of
return would translate to an extra $2,500 a year, more than someone earning
$100,000 would get by moving from a 10% to a 12% savings rate.
Trouble is, the more risk you take in pursuit of loftier gains, the more
your returns will jump up and down from year to year, and the harder your
portfolio will get hammered during market setbacks. Take a 55-year-old a
decade from retirement — for that person, a pedal-to-the-metal approach is
no help. Because you have less time to recover from a setback, it slightly
cuts your chances of reaching your goals.
That said, you still have one way to effectively earn more on your portfolio
— without ratcheting up risk: Pare investment fees.
Annual expenses for stock funds average 1.5%, while the yearly tab for bond
funds comes in at roughly 1%. By opting for low-cost options like index
funds and exchange-traded funds, which often charge less than 0.5% annually,
you may be able to reduce your costs by anywhere from a half to a full
percentage point a year. Over the course of a career, that can boost the
eventual size of your nest egg a good 10% to 20%.
Finally, there's one more compelling reason not to rely on astute investing.
Given the sluggish growth and onerous levels of government debt here and
abroad, even the most savvy investors may have to settle for relatively
modest returns. That could be a major problem if your retirement security
hinges on racking up big gains. Boosting your savings rate is a surer way to
increase the ultimate size of your portfolio.
So by all means, make sure you're investing as well as you can. If you
really want to improve your prospects, though, save more.
Why You Should Stop Trying to Beat the Market
by Walter Updegrave
How much better will you do if you invest well instead of poorly (or earn
the average)? -- James McGrath, San Marcos, Calif.
More from CNNMoney.com:
• Ultimate Guide to Retirement
• What to Do With $1,000 Now
• How to Get Out of Debt Quickly
Considering all the attention investment pros (and financial magazines)
lavish on picking the right stocks and funds, I can understand why you might
think superior investing ranks above all else when it comes to a secure
future and a comfortable retirement.
Savvy investing is certainly important — you don't want to blow your
savings on lousy funds or ineffectual strategies. And you'll end up richer
if you happen upon a winning investment. If you'd owned the Sequoia Fund for
the past decade, for example, a $10,000 balance would have grown to more
than $16,000 now, vs. $12,800 if you'd simply earned the market return.
But as a practical matter you can't know in advance which fund or stock will
beat the market — in fact, over the past 15 years, only 55% of U.S. equity
funds did so, according to Morningstar. Rather than pinning your hopes on
higher returns, I'd say boosting your savings rate is a surer way to improve
your retirement prospects.
To see what I mean, check out this example. Let's say you're 35 years old,
earn $60,000 a year, and sock away 10% of your salary (including your
company match) into a 401(k) that's already worth $75,000. And assume you're
stashing your retirement moolah in a diversified portfolio of 60% stocks
and 40% bonds.
You're doing a reasonable, though not spectacular, job of preparing for
retirement. Your savings rate is decent, though it could be better. As for
investing, you're hardly a slouch, but ideally you should be devoting more
of your 401(k) to stocks.
The key is starting with an overall plan — that is, deciding on the
appropriate asset allocation, or blend of stock and bond funds that makes
sense given your age and stomach for risk.
Indeed, when the folks at T. Rowe Price ran the numbers on this saving and
investing regimen, they projected that you'd have a 68% chance of
accumulating enough money to retire in 30 years on 70% of your pre-
retirement income and not deplete your funds until age 92.
Not bad. But if you could do just one thing to improve your outlook, what
would it be? Save more or earn more?
You can't, of course, say you'd prefer an 8% annual return instead of 6% and
turn a dial higher to get it. The investing world doesn't work that way. So
to try to earn more you have to invest more aggressively.
In this example, both increasing your savings rate from 10% to 12% and
shifting to a more growth-oriented portfolio that's 80% stocks and 20% bonds
— an appropriate mix for a 35-year-old — will boost your chances of
retirement success. But saving more has a larger effect than earning a
higher return would.
In the real world you're not limited to one move. You can bump up the amount
you save and improve a sub par investing strategy. Do both those things —
which, ideally, you would — and you can feel even more confident about
achieving a secure retirement.
In theory, later in your career, when you're more likely to have a large
balance in your retirement accounts, a relatively modest increase in your
rate of return could boost the size of your nest egg more than upping your
savings rate would.
On a $500,000 portfolio, for example, an additional half percentage point of
return would translate to an extra $2,500 a year, more than someone earning
$100,000 would get by moving from a 10% to a 12% savings rate.
Trouble is, the more risk you take in pursuit of loftier gains, the more
your returns will jump up and down from year to year, and the harder your
portfolio will get hammered during market setbacks. Take a 55-year-old a
decade from retirement — for that person, a pedal-to-the-metal approach is
no help. Because you have less time to recover from a setback, it slightly
cuts your chances of reaching your goals.
That said, you still have one way to effectively earn more on your portfolio
— without ratcheting up risk: Pare investment fees.
Annual expenses for stock funds average 1.5%, while the yearly tab for bond
funds comes in at roughly 1%. By opting for low-cost options like index
funds and exchange-traded funds, which often charge less than 0.5% annually,
you may be able to reduce your costs by anywhere from a half to a full
percentage point a year. Over the course of a career, that can boost the
eventual size of your nest egg a good 10% to 20%.
Finally, there's one more compelling reason not to rely on astute investing.
Given the sluggish growth and onerous levels of government debt here and
abroad, even the most savvy investors may have to settle for relatively
modest returns. That could be a major problem if your retirement security
hinges on racking up big gains. Boosting your savings rate is a surer way to
increase the ultimate size of your portfolio.
So by all means, make sure you're investing as well as you can. If you
really want to improve your prospects, though, save more.