Step 2: Spread the Wealth
Now that you’ve figured out how much to save,
the question is where to invest it. The most
important factor to consider is diversification.
For a 40-year-old investor with 25 years
of work to go, Kelly Campbell, president of
Campbell Wealth Management, in Fairfax,
Virginia, recommends spreading money across
at least 10 asset classes. So instead of just
investing in a fund that owns U. S. stocks, you’d
invest equal amounts in six funds: “value”
stocks in small, medium, and large companies,
as well as “growth” stocks in small-cap, mid-
cap, and large-cap firms. (For recommended
funds in each category, see “Portfolio All-
Stars,” below.) The other four categories are
international stocks, real estate, government
bonds, and corporate bonds. Diversifying
keeps you from being overexposed to a single
category. True, nine of these 10 categories
were down last year, but last year was also the
worst market since 1931.
That said, Campbell’s plan assumes that
you have the stomach for occasional market
routs. If you sold in a panic last year (or got
an ulcer worrying about your ever-shrinking
nest egg), his allocation is too aggressive for
you, and you should boost the share invested
in bonds. Just know that you’re likely to get
lower long-term returns. To find great funds,
research each portfolio at morningstar.com.
“You don’t necessarily want the manager with
the best return last year, but the one with
consistently solid returns over the years,” says
Campbell. Putting your cash into the hands
of top-notch managers who charge low fees
could mean an extra $100,000-plus by the
time you retire.
get access to a better small-cap fund. Many
experts recommend low-fee index funds that
simply hold every stock in a given category
and often end up outperforming high-priced
actively managed portfolios.
Rebalancing takes the guesswork—and more
important, the emotion—out of the process
and guarantees that you take a few chips off
the table every year.
Step 4: Rebalance Your Holdings
There is one surefire way to buy low and sell
high, and it’s called rebalancing. Here’s how
it works: Each January, when your year-end
statements arrive, see which of your 10 funds
have done well and which have done poorly,
and then make some adjustments. Sell a
portion of the better-performing funds and
invest more into funds in the losing asset
classes to get back to 10 percent in each. Yes,
it’s painful to pare back those top performers,
but consider what happens if you just let your
winners run: An investor with a diversified
portfolio who had 10 percent in tech stocks in
1995 could have had as much as 80 percent of
his holdings exposed to tech when the Nasdaq
peaked at 5,048 in March 2000. The Nasdaq
ended last year at 1,577.
“The buy-and-hold mantra that has been
screamed at us is dead,” says Dean Barber,
a financial advisor in Kansas City, Kansas.
“Investors need to pay more attention and
be more tactical inside their portfolios.”
Step 5: Consider the Autopilot Option
Not only is sticking with the above strategy a
great way to build wealth, but it has an added
benefit: It gives you something to do when the
market turns against you. Psychologists have
found that simply taking action helps men
handle stress. That said, it does require action,
and if you find yourself procrastinating or
forgetting or simply unwilling to add another
item to your to-do list, go to plan B.
Plan B is to put your retirement fund
on autopilot by investing in a target-date
portfolio. Choose a target date of, say, 2035,
and the fund will automatically reduce your
equity investments and increase your fixed-income exposure as you get closer to that year.
The downside is that target-date funds can’t
be tailored to your specific circumstances and
risk tolerance. And you have fewer options.
No, you can’t control the markets, but by
taking command of your retirement savings,
you can maximize your gains in good times
and minimize the losses when the bear
comes back.
PORTFOLIO ALL-STARS
These funds will help your retirement savings recover from the bear market
We asked Chicago-based research firm Morningstar to recommend mutual funds in 10 categories.
After choosing the best funds in your 401(k), look to these offerings to complete your asset allocation.
Step 3: Consider All Accounts
Depending on how many different jobs you
and your wife have held, you could easily
have four or five old 401(k)s or IRAs kicking
around. Think of all of your accounts as one
big pool of money when investing across the
10 different categories, and take advantage of
the flexibility that multiple accounts allow. For
example: Odds are, your current employer’s
retirement plan offers a few funds that get
high marks from Morningstar, as well as
plenty that don’t. No problem. Invest in, say,
that great international fund and those good
bond options, but avoid the small-cap stinker
with the sky-high fees and use an IRA to
SMALL VALUE
Royce Special Equity
Invt (RYSEX)
The fund has a nearly
singular focus on
inexpensive stocks and
companies with “very
clean accounting.”
MID-CAP VALUE
Janus Mid Cap Value
Investor (JMCVX)
Manager Tom Perkins
buys well-run firms
with minimal debt and
steady cash flow when
they are out of favor.
SMALL GROWTH
Bridgeway Small-Cap Growth (BRSGX)
Manager John
Montgomery invests
based on mathematical
models, removing
emotions from the
equation. The fund can
suffer in tough times,
but often crushes the
market on the way up.
during the bubble
years, but it stood out
last year when it lost
less than virtually any
of its peers.
MID-CAP GROWTH
Brandywine (BRWIX)
Known for their comprehensive research
and aggressive
investing, the managers of this fund have
produced great returns
over the years.
INTERNATIONAL
Artio International
Equity II A (JETAX)
Among management’s
shrewd calls: Avoiding
banks in the U.K.,
which were hit even
more severely than
their U.S. counterparts.
CORPORATE BONDS
T. Rowe Price Corp.
Income (PRPIX)
Nearly a pure corporate
bond fund, this offering
looks tasty right now
after corporates were
hammered in the credit
crunch. Morningstar
likes its emphasis on
research, which should
help it avoid defaults.
LARGE VALUE
T. Rowe Price Equity
Income (PRFDX)
Veteran manager Brian
Rogers has beaten
competitors over three,
five, and 10 years, while
charging about half as
much in fees.
LARGE GROWTH
Jensen J (JENSX)
This conservative fund
lagged competitors
REAL ESTATE
JP Morgan U.S. Real
Estate A (SUSIX)
Before you run away
screaming at the
thought of real estate,
consider that over
the long-term, it can
smooth your returns
by zagging when
stocks zig.
GOVERNMENT
BONDS
Fidelity Intermediate
Government (FSTGX)
You can’t find anything
steadier than this
fund. It avoided
the temptation of
mortgage-backed
bonds and has reached
out across all sectors
of government bonds
while minimizing risk.
SRIDHAR PAPPU
