diversification

Start an Investment Deathmatch to Find the Best Investments

Dr Penny Pincher — Tue, 13 Mar 2018 09:30:19 +0000

You can learn a lot about investing by setting up what I call an "investment deathmatch" in your portfolio. In such a setup, your hand-picked investments compete with each other to produce the best return and rack up the biggest balance.

An investment deathmatch starts off by investing equal amounts of money in several investment funds at the same time. This makes it easy to monitor how your investments are performing relative to each other simply by glancing at the fund balances.

Some benefits of this "investment deathmatch" approach for your portfolio are:

You get the experience of picking out multiple investments.
You learn from seeing how different investments perform over time relative to each other.
Your portfolio risk is reduced due to diversification.
Based on your investment performance results, you can invest more money in your best performing funds.

Here's how to set up your own investment deathmatch.

1. Select categories of funds

While you could pick funds from the same investment category to compete in your deathmatch, there is more to be learned by selecting funds from a variety of categories. Plus, you will build a more diversified portfolio if you choose a variety of funds, reducing your risk in case one investment sector falters.

Here are some ideas for fund categories to choose from:

S&P 500 index fund: A good "pace car" to see how your other investments perform relative to large-cap equities in the stock market.
Growth fund: Will a growth fund provide better returns than the overall market?
Mid-cap fund: Mid-sized businesses have established products and customer bases and lots of room to grow.
Just-for-fun: Pick an international fund, real estate investment trust (REIT), gold fund, or whatever investment you think is interesting and could perform well.

2. Pick your funds

Now that you have outlined your investment categories, it's time to do your homework and pick your favorite fund in each category. Some of the key criteria to consider when selecting funds for your investment deathmatch are:

Investment objective: Do you want an aggressive growth fund that takes higher risks to seek higher returns, or would you rather have a more conservative fund that will be more likely to protect your investment?
Active vs. passive management: Do you want a fund with a fund manager making trades to try to maximize returns, or a passive fund that simply tracks a segment of the market?
Fees (expense ratio): Funds with lower fees are best for maximizing the growth of your investment over time, but some investment types are more complex and tend to have higher fees. Actively managed funds have higher fees than passive funds and index funds.
Performance record (return): While past performance does not predict future results, most investors tend to select funds with returns that have performed well compared to similar funds over the past one to five years.
Management team tenure: Some investors prefer funds that have had a consistent management team for a number of years.

3. Invest exactly equal amounts in each fund

With your investment funds picked out, the next step is to invest exactly equal amounts in each one. For example, for a $2,000 investment with four funds in your deathmatch, put exactly $500 in each fund to start off the competition.

The reason for putting the exact same amount in several investments on the same day is to make it easy to compare the performance of your funds simply by checking the fund balances at any time. You don't need to keep track of anything or calculate rate of return to evaluate their performance. Whichever fund has the biggest balance is winning.

Of course, you will need some money to fund your investments. If you already have cash in hand (in after-tax dollars), it might be easier to invest the funds in a Roth IRA rather than a traditional IRA. Another source of funding to start an investment deathmatch is to execute an exchange to sell funds you already own and move the proceeds into the funds for your deathmatch. This can be done easily in a traditional IRA, Roth IRA, or 401(k) plan.

4. Watch and learn as funds compete to make you money

Now for the fun part — watching your fund choices fight it out to see which will perform the best. The investment deathmatch format makes it effortless to see which investment are performing well simply by checking in on the fund balances. There is no substitute for the experience you get picking out funds and investing your own money to learn what works and what doesn't.

5. Start new investment deathmatches as a smarter investor

Over time, some of your investments will perform better than others. You might decide to leave the best performing funds in place and start a new deathmatch using funds from investments that are not performing as well.

You can pick a different amount to invest in each deathmatch you start so you can better track which funds are directly competing with each other. For example, if you have a deathmatch running with $500 investments, you could start another one with $1,000 investments so you can tell which investments are in which deathmatch.

The funds in your investment deathmatch are competing to win the title of best investment, but the real winner is you. You get an easy way to learn about investing all while watching your portfolio grow.

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This article is from Dr Penny Pincher of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

Think Outside the Index When You Rebalance Your Investment Portfolio

Tim Lemke — Mon, 20 Nov 2017 09:30:10 +0000

As the year winds down, it's common for investors to examine their portfolios and consider some rebalancing. This means looking at your investments to make sure you're not over-invested or underinvested in certain areas.

Many investors will simply buy shares of a mutual fund that mirrors the performance of the S&P 500. You can do well with this simple approach, but you will lack exposure to many smaller or midsize companies, and will be heavily invested in some industries (such as technology) but not others.

Here are some sectors and asset classes that you can invest in to make your portfolio truly diverse.

1. Utilities

They aren't the sexiest investments, but this sector contains many great dividend stocks that can boost your income while offering the stability your portfolio might need. Consider that during the market tumble between 2007 and 2009, the S&P 500 lost about half its value, while the Dow Jones Utility Average index lost about one third.

Right now, utilities make up around 3 percent of the S&P 500, so many investors don't have much exposure. Consider mixing in some utilities by investing in mutual funds like the Vanguard Index Utilities Fund [VUIAX] or ETFs such as the iShares Global Infrastructure ETF [IGF].

2. Materials

This is another underappreciated sector that deserves more love from investors. What are "materials" in stock market lingo? This refers to companies that discover and process raw materials. Think of steel manufacturers, mining companies, or chemical producers. The materials sector also makes up about 3 percent of the S&P 500, but has outperformed the broader stock market over the last year. Materials also outperformed the S&P 500 during the Great Recession.

Well-performing materials mutual funds include Vanguard Materials Index Fund [VMIAX] and the Fidelity Select Materials Portfolio [FSDPX].

3. Telecommunications services

This sector includes companies such as Verizon, AT&T, and T-Mobile. Companies like these have not been the best performers in recent years, but they can bring stability to your portfolio and offer a very healthy dividend yield. Investors might earn an annual dividend of 5 percent or more with these stocks, which is helpful income during this time of low interest rates. Older investors who are willing to sacrifice growth for income and stability may want to take a hard look at telecom services, which currently make up about 2 percent of companies in the S&P 500.

4. Energy

This sector comprised more than 10 percent of the S&P 500 as recently as three years ago, but that's down to about 6 percent now. That's a shame, because the sector includes some very strong companies including ExxonMobil and Chevron. It's been a very volatile few years for the energy sector due to the tumble in oil prices, but there are bargains to be had, and the world is not going to cease demanding energy, especially from developing countries. Investing in green energy can offer some growth opportunities, and you'll be helping the planet in the process. Energy stocks can also offer higher dividend yields than many sectors.

5. Consumer staples

This sector likely has some of the most familiar stocks you can think of. Currently making up over 8 percent of the S&P 500, consumer staples includes firms like Coca-Cola, Procter & Gamble, Unilever, and Walmart. And yet, this sector is somewhat underrepresented in the S&P 500. This sector is considered a safe haven for investors, because it often performs better than other sectors during times of market uncertainty. That's because even during the worst of times, we all still need basic household products. This sector also has an average dividend yield of nearly 3 percent, making it attractive to income investors.

To get more exposure to consumer staples, take a look at ETFs such as the iShares Consumer Goods ETF [IYK] and Vanguard Consumer Staples ETF [VDC].

6. Small cap stocks

When you invest in the S&P 500, you're investing only in the largest companies. These companies may offer solid returns, but it's never good to be invested too heavily in companies of a similar size. To build a truly diversified portfolio, it helps to invest in a healthy dose of smaller companies as well. Small cap stocks are generally those with market capitalization between $300 million and $2 billion. These firms tend to be more volatile, but their gains can be more dramatic. Consider that the T. Rowe Price Small Cap Fund [OTCFX] has averaged a return of around 20 percent over the last year, compared to about 16 percent for the S&P 500. Small cap value stocks — comprised of small companies generally considered undervalued by fund managers — have performed even better over the last year.

7. Mid-cap stocks

Not too big and not too small, mid-cap stocks include some very well-run companies in a wide range of industries, and they can bring growth and stability to your portfolio. If you want to invest in midcaps, forget the S&P 500 and go with the S&P 400, which includes the top mid-sized companies and routinely outperforms the smaller and larger asset classes.

The Vanguard MidCap ETF [VIMSX] has seen a 10 percent annual return since 2004, and the T. Rowe Price Midcap Growth Fund [RPMGX] has seen a 13 percent annual return since the early 1990s.

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This article is from Tim Lemke of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

The 3 Rules Every Mediocre Investor Must Know

Philip Brewer — Mon, 27 Feb 2017 10:30:46 +0000

Mediocre financial advice can earn you mediocre investment returns — and mediocre investment returns are all you need to save for a house, send your kids to college, and fund your (potentially early) retirement. Mediocre investment advice is pretty straightforward. In fact, the only thing that's complicated about getting mediocre financial results is the stuff that comes before investing: Things like earning money, keeping your debt in check, finding a career, living frugally, and most crucially, building an adequate emergency fund.

Once you've got those things taken care of, you're ready to start investing. If you're at that point, here's my mediocre investment advice: Create a diversified portfolio of low-cost investments and rebalance it annually.

Diversified Portfolio

It's important to have diversity at several levels. Eventually you'll want diversity in investment types — not just stocks, but also bonds, real estate, precious metals, foreign currency, cash, etc. More importantly, you want finer-grained diversity especially in the earlier stages of building your portfolio. Don't let your portfolio get concentrated in just one or a few companies. (For what it's worth, don't let it get concentrated in the stock of your employer, either. That sets you up for a catastrophe, because if your employer runs into trouble, the value of your portfolio can crash at the same time your job is at risk.)

In the medium term — after you've got a well-diversified stock selection, but before it's time to branch out into more exotic investments — you'll want to expand the diversity of types of companies. Not just big companies, but also medium-sized and small companies. Not just U.S. companies, but also foreign companies. Not just tech companies, but also industrial companies and financial companies, and so on.

Diversity wins two ways. First, it's safer: As long as all your money isn't in just one thing, it doesn't matter so much whether it's a good year or a bad year for that thing. Second, it produces higher returns: No one can know which investment will be best, but a diversified portfolio probably has at least some money invested in some investments that will do especially well. (Of course retrospectively, there will have been one investment that does best, and risking having all your money in that would have produced the highest possible return — but that's exactly what a mediocre investor knows better than to attempt.)

Of course, you don't want a random selection of investments, even if such a thing might be quite diverse. You want a reasonably balanced portfolio — something I'll talk about at the end of this post.

Low-Cost Investments

The less money you pay in fees and commissions, the more money you have invested in earning a return.

Getting this right is so much easier now than it was when I started investing! In those days, you could scarcely avoid losing several percent of your money right off the top to commissions, and then lose another percent or two annually to fees. Now it's easy to make a stock trade for less than $10 in commissions, and it's easy to find mutual funds and exchange-traded funds that charge fees of only a fraction of 1%.

Still, it's easy to screw this up. Any investment that's advertised is paying its advertising budget somehow — probably with fees from investors. Any investment that's sold by agents or brokers is paying those agents or brokers somehow — probably with commissions or fees from investors.

All those costs come straight out of your return. Keep them to a minimum.

Rebalance Annually

Your diversified portfolio will immediately start getting less diversified: Your winning investments will become a larger fraction of your portfolio while your losers will become a smaller fraction. In the short term, that's great. Who doesn't want a portfolio loaded with winners? Pretty soon though, you start losing the advantages of diversification. Last year's winners will inevitably become losers eventually, and you don't want that to happen after they've become a huge share of your portfolio.

The solution is to restore the original diversity. Sell some of the winners, and use the resulting cash to buy some more of the losers. It's the easiest possible way to buy low and sell high. (Maybe you don't want to buy exactly the losers — not if their poor performance leads you think there's something really wrong with them. But buy something kind of like them. Health care companies probably belong in your portfolio, even if many of them did badly this year.)

There are costs to rebalancing — costs in time and effort (figuring out what to sell and what to buy), and actual costs in commissions and fees. Because of that, you probably wouldn't want to rebalance constantly. You could make a case for monthly or quarterly rebalancing, but even that seems like a lot of effort for a small portfolio. Annually seems to hit the sweet spot.

What Goes Into a Diversified Portfolio?

What I'm going to suggest is that you start with a balanced portfolio of stocks and bonds.

It's not that there aren't plenty of other worthy investment options — cash, gold, silver, real estate, foreign currencies, etc. — it's just that they all have complications of one sort or another, and you can get started on earning your mediocre returns without them.

My mediocre investment advice then is that your portfolio should be a balance of stocks (for maximum growth) and bonds (for income and stability).

Finding the Right Balance Comes Down to Age — Yours

What's the right balance? An old rule of thumb was that 100 minus your age would be a good target percentage for the stock portion of your portfolio. At the start of your career, you'd have nearly 80% of your investments in stocks, and that fraction would gradually decline to about 35% as you approached retirement. The theory was that a young person can afford to take big risks, because he or she has time to wait for an eventual market rebound (and because during the early phase of building up a portfolio, even a large percentage loss is a small dollar amount). This makes a certain amount of sense. In fact, you could argue that a stock market that collapsed and then stayed down just when you started investing would be great — it would give you decades to buy stocks cheap.

That rule of thumb isn't bad, although with people living longer these days, it probably makes sense to keep a higher portion of stocks in your portfolio during the last years before and first years after retirement. Once you hit 50, maybe only cut your stock portfolio by 1% every two years.

When you're just getting started, feel free to keep it very simple. Perhaps just start putting money into a broad-based stock fund (such as an S&P 500 index fund). You can add a bond fund right away if you want, or wait until your annual rebalancing.

There are mutual funds that will manage this balance for you, holding stocks and bonds with a balance that shifts over time to some target date, at which point they'll hold a portfolio suitable for someone who has retired. You don't need them. In particular, they tend to have higher expenses, violating the "low cost" principle. You can do it easily enough for yourself. (Of course if you find that you don't do your annual rebalancing, then maybe paying a fund to do it for you is worth the expense.)

As an alternative to mutual funds, you can use exchange traded funds or ETFs. It doesn't matter.

Once your portfolio of stocks is large, you probably want to move beyond a single fund. Look at the other low-cost funds offered by the same fund family that provides your S&P 500 index fund. Consider adding a fund that includes foreign stocks (especially if the dollar seems strong at the time you'll be buying). Consider adding a fund that includes dividend-paying stocks (especially if interest rates are low relative to dividends).

Follow these mediocre tips, and you'll be racking up mediocre returns in no time! And remember — mediocre returns are all you need to live well and retire well.

This article is from Philip Brewer of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

9 Costly Mistakes DIY Investors Make

Tim Lemke — Wed, 05 Oct 2016 10:30:08 +0000

With the right approach and education, it's possible for people to handle their own investments. But it's also easy to make mistakes that could cost you large sums of money in the long run.

If you're a do-it-yourselfer, ask yourself whether you're making any of these mistakes below. If so, it may be worth seeking professional advice from a certified financial planner.

1. Trading Without Considering Fees and Taxes

For many investors, it's fun to trade stocks. The actual buying and selling can be a bit of a rush, especially when things are going well. But all of that activity can come with a cost, in the form of transaction fees and capital gains taxes. If you are finding that the returns on your portfolio seem a bit lackluster, it may be because you're investing without taking these costs into account. More experienced investors and financial advisers understand how to avoid extra fees and maximize returns as a result.

2. Getting Emotional

Investing your own money can sometimes be hard on the psyche. You may go through stretches where you see your portfolio shrink. Stocks that you personally selected may not always perform the way you predicted. Markets can be volatile, and not everyone can stomach it. If you find yourself getting stressed out by the investing process or buying and selling based on emotion, you may want to consider having a financial adviser take over the reigns.

3. Not Investing Enough

When you invest on your own, you may only be guessing as to how much you need to save. And it's common for investors to feel a little skittish and invest too little if the market is down. A financial adviser may be more tuned into the appropriate level of risk an investor can take on, and will usually advise a more aggressive approach for someone far out from retirement.

4. Not Diversifying Enough

Most do-it-yourselfers understand the basics of diversification, and will invest in index funds that track the S&P 500 or broader stock markets. And that's perfectly fine. But often, these funds are heavily weighted toward larger companies or certain industries. If you are investing only in basic index funds, you may not have good exposure to international markets or smaller companies, for example. There may be entire industries that will be underrepresented in your portfolio.

To achieve true diversification, you can have an S&P Index fund as a base, but should also look for funds and stocks that fill in the gaps.

5. Failing to Rebalance

You may think you're creating a diverse portfolio based on the investments you've selected. But have you checked the balances recently? Over time, portfolios can get out of whack if certain investments are performing better than others. For example, you may think you're investing in 50% large cap, 25% small cap, and 25% mid cap stocks. Until one day, you check your account and realize that small cap stocks make up 40% of the portfolio. Financial advisers will recommend when to rebalance, and offer advice on how to avoid taxes in the process.

6. Trying to Beat the Market

Some investors insist on doing things themselves, because they believe they are expert stock pickers and can beat the performance of the overall stock market. In most cases, they are wrong. Numerous studies have shown that even professional investment managers can't beat the market on a regular basis, and that most investors would be best off with a portfolio of index funds.

7. Falling in Love With Shiny New Things

Do-it-yourselfers can become enamored with whatever the hot stock is at the moment. They go for name brands and flash rather than looking closely at a balance sheet. They also tend to go with what's familiar, rather than doing some research and finding investments that are less well known but of sound quality.

8. Having No Backup Plan

If you are an older DIY investor, do you have a plan for what happens to your investments if you are incapacitated? Are you sharing your investment accounts with your spouse or other loved ones? Many DIY investors are too stubborn to seek help from anyone, and thus run into problems when they are no longer in a position to manage things themselves. It's fine to handle your own investments if you're confident enough to do so, but it's wise to have a plan for how things will be dealt with if you're no longer in charge.

9. Becoming Too Consumed

Realistically, the average person can handle their own investments while checking in only periodically each week. A properly balanced portfolio does not need a lot of maintenance. But investing can be like an addiction to some people, and it's possible to spend hours a day buying and selling and becoming obsessed with the movement of the markets. If you're finding that your investing is having a negative impact on your relationships and other aspects of your life, it may be best to back off and let someone else handle things.

This article is from Tim Lemke of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

5 Surprising Ways the Rich Get Richer

Dan Rafter — Mon, 23 Nov 2015 14:00:22 +0000

You've noticed an interesting phenomenon: The richest people in the country have a knack for getting richer. Don't get jealous. Emulate them, instead.

How do the rich get richer? They don't fall for get-rich-quick schemes, they don't fall in love with their stocks, and they certainly don't panic whenever the economy takes a dip. And if you do the same, you, too, can steadily grow your wealth.

Here is look at some of the surprising — and not so surprising — ways that the rich keep getting richer:

1. They're Patient and Diversified

Laurie Samay, a certified financial planner and portfolio manager with Scarsdale, New York-based Palisades Hudson Financial Group, says that the wealthy never chase get-rich-quick schemes. Instead, they are more focused on preserving their wealth, usually by taking a "slow-and-steady" approach to investing.

The investment portfolios of the wealthy are almost always filled with a diverse array of stocks and bonds. Diversity protects the wealthy against economic swings. If one asset class is struggling because of outside economic factors, another might be doing well. Say oil companies are struggling because of low oil prices. Car makers might be doing better because gas prices are lower, encouraging more consumers to buy their vehicles. By investing in both oil producers and car makers, the wealthy investor's portfolio doesn't take as big a hit.

"Academic studies have concluded that the mix of stocks and bonds in a portfolio has the greatest influence on performance, even more so than transaction costs and security selection," Samay said. "Like the rich, your portfolio should be diversified."

Samay says that all investors should invest in different types of bonds, large-cap equities, small-cap equities, and international equities. She also recommends that consumers invest in specialty asset classes like real estate and natural resources to create the most diversified portfolio possible.

2. They Recognize Panic as Opportunity

Remember when the housing market crashed in 2008 and 2009? David Hardin, president of Hardin Financial Group in Troy, Michigan, does. He also remembers that the rich — at least the savviest of them — took this time to invest in real estate at lower prices as others dumped their properties. Today, the value of these investments has soared.

"Buy when others are panicking," Hardin said. "That is a strategy that the wealthy always use to grow their income."

Those who stay wealthy avoid the herd mentality that often results in big sell-offs in asset classes or stocks, Hardin said. Instead, they buy stocks and other investments when their value is at their lowest.

"People who really understand the markets and study them see opportunities when people are panicking," Hardin said. "That is when they often make lots and lots of money."

3. They Invest in Socially Responsible Companies

Andre Cherry, chief executive officer of Los Angeles-based investment firm Aspiration, says that the wealthy tend to invest in companies that are both sustainable and socially responsible. They don't do this just because they want to do good. They do it because these companies tend to be more successful.

"50 years ago, a company's value was largely in how many factories or how much heavy machinery it had," Cherry said. "Today, the real value of a company comes in their reputation. You can see this in the kind of financial hit BP took after Deepwater Horizon. Its stock took a hit that it still hasn't really recovered from."

Companies that are doing good — installing environmentally friendly practices, investing in employee wellness programs — tend to perform better, too, Cherry said. He pointed to Johnson & Johnson's employee wellness initiative. For each dollar that the company spends on the program, it receives $2.71 back in the form of a more productive and healthier workforce.

"When a company cuts waste or becomes more environmentally friendly, it usually saves money," Cherry explained. "When it installs workplace practices that encourage a more diverse workforce, they get an employee base that is more innovative and productive. Companies that have executives and boards of directors who are given financial incentives to think about the long-term instead of the short-term perform better, too."

4. They Never Fall in Love With Their Investments

Even the bluest of blue-chip stocks can steadily lose value as the country and consumer tastes change. The wealthy recognize this, and never fall in love with their stocks, Hardin pointed out.

"I've met some people who are absolutely in love with blue-chip stocks that they have inherited," Hardin said. "They won't get rid of them, and some of those companies are no longer doing well. They haven't done well for decades. They're living on past glory."

Hardin uses the classic example: "If the company you invest in sells buggy whips and buggy whips aren't in demand any more, you might need to get rid of that stock."

This leads to another important point about the wealthy: They spend a lot of time researching the companies in which they have invested. This helps them identify what might be cloudy futures for companies that have performed well in the past.

"You can't be efficient in the stock market or with your investments without research," Hardin said. "Would you buy a business without knowing what that business does and without understanding the market in which it operated? Of course you wouldn't. And you shouldn't invest your money without doing the same kind of research."

5. They Pay as Little in Taxes as Possible

The wealthy face the highest tax brackets. Because of this, they work hard to reduce their tax bill — legally, of course.

Samay said that wealthy investors distribute their investments across a mix of taxable, tax-deferred, and tax-free accounts, with the goal of placing their income-producing securities in tax-deferred or tax-free accounts. They reserve their taxable accounts for those growth investments that produce little to no dividend income.

This kind of mix reduces the amount of taxes the wealthy pay each year, which leads to one final point from Cherry: The wealthy spend as much time making sure that they don't lose money as they do working to make more dollars.

"It's easier to lose money than make it," Cherry said. "Protecting that wealth is one way to stay wealthy."

What personal finance lessons have you learned by watching the wealthy?

This article is from Dan Rafter of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

The Top 5 Index Funds to Own Now

Qiana Chavaia — Fri, 24 Apr 2015 11:00:07 +0000

Can you tolerate some market volatility? Is investing in passively-managed index funds still part of your diversification strategy? Hang in there if it is, because index funds are still a good choice.

If you're hot on the trail for index funds to invest in, here are the top five index funds to own right now.

1. Vanguard High Dividend Yield Index Fund Investor Shares (VHDYX)

Morningstar rating: 5 stars

This large capitalization fund was designed for investors seeking long-term growth and those who can withstand greater volatility. This is an income-focused fund that invests in large U.S. companies that tend to pay higher dividends. Some of its holdings include ExxonMobil, Proctor & Gamble, and JP Morgan Chase, to name a few.

2. Vanguard PRIMECAP Fund Investor Shares (VPMCX)

Morningstar rating: 5 stars

A long-term capital appreciation fund that invests in large and mid-cap companies with an emphasis on the technology and health care sectors. The fund follows a well-established investment strategy of dividing its portfolio amongst several fund managers for diversity of thought. Its holdings include Texas Instruments, Inc., Eli Lily & Co., FedEx Corp., and many others.

3. Vanguard PRIMECAP Core Fund (VPCCX)

Morningstar rating: 5 stars

The PRIMECAP Core Fund is very similar to its younger sibling, PRIMECAP Investor Shares. This is a large cap fund that invests using the investment strategies of multiple fund managers. The key difference is the fund has both value and growth perspectives. Some of its holdings include Texas Instruments, Inc., Eli Lily & Co., Google, and Johnson & Johnson.

4. Vanguard U.S. Value Fund (VUVLX)

Morningstar rating: 4 stars

This is a large to mid capitalization fund that remains vested in about 200 companies using a qualitative approach that seeks to identify undervalued stock. Due to its broad-market exposure, investors should expect greater volatility and therefore invest with a long-term investment horizon. Some of the fund's major players are Pfizer, Inc., AT&T, Chevron, ExxonMobil, and Wells Fargo & Co.

5. Vanguard Consumer Staples Index Admiral Shares (VCSAX)

Morningstar rating: 4 stars

This fund is comprised of U.S. consumer staples, such as Wal-Mart, Costco, Coca-Cola Co., and PepsiCo. As a result, the fund will realize volatility consistent with consumer behavior, and investors should expect greater fluctuations. This is a very high-risk investment and it's advisable that it is used to hedge an already well-balanced portfolio.

Are index funds part of your portfolio? Which?

This article is from Qiana Chavaia of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

The Top 5 ETFs You Should Buy Now

Qiana Chavaia — Tue, 09 Dec 2014 14:00:07 +0000

Since their launch just a couple of decades ago, Exchange Traded Funds have quickly grown in popularity among investors due to their low expense ratios, tax efficiency, and potential for easy diversification. Today, there are more than 5,000 domestic and international ETFs trading in the global marketplace, holding baskets of assets such as stocks or bonds across a wide variety of sectors.

As with any investment, the funds you choose should be reflective of your risk-tolerance and investment goals. That said, we've rounded up a few ETFs we believe are worth a look, based on today's market conditions and performance.

Here are the top 5 ETFs you should own now.

VTI Vanguard Total Stock Market

VTI invests in large, mid, and small cap stocks, and tracks the overall stock market. It's an ideal fund for investors new to ETFs, since it provides ample diversification through broad stock market exposure. It's returns are nothing to sneeze at, either; for 2014, it's offered over 12% gains year-to-date, and posted a whopping 33% return in 2013. And with its strong 4-star Morningstar rating, it also balances its rewards with suitable levels of risk.

VOO Vanguard S&P 500

VOO invests in stocks in the S&P 500 Index, tracking the performance of some of the largest U.S. companies. This low-cost fund has high potential for growth, but potentially greater volatility than VTI. Still, it also has a solid 4-star Morningstar rating, indicating reasonable levels of risk for its year-to-date returns of nearly 14%.

VNQ Vanguard REIT ETF

VNQ invests in stocks issued by real estate investment trusts (REITs), companies that purchase office buildings, hotels, and other real estate property. Use it to diversify the risks of stocks and bonds in your portfolio. REITs can offer good long-term returns and offer a hedge against inflation because real estate values tend to rise with inflation. The 4-star rated fund has delivered returns in excess of 27% year-to-date.

MUB iShares S&P National AMT

MUB iShares provide exposure to more than 2,000 US municipal bonds, with top holdings in California and New York. The fund offers growth potential with lower volatility, making it ideal for long-term growth investment goals. In 2014, this 4-star rated fund has delivered returns in excess of 8%. This is a tax-efficient bond fund which can help hedge your equity exposure.

TDN Deutsche X-trackers 2030 Target Date

TDN is a hybrid ETF that invests in both domestic and international stocks, bonds, currency, and commodities, with the majority of its holdings in U.S. based stocks. This target-date fund is designed for those seeking retirement in the year 2030, and automatically rebalances its holdings' risk profile as you approach your 2030 retirement. DTN is a low-cost fund with broad diversification that has realized annual returns in excess of 15%.

Do you have a favorite ETF not listed here? Tell us what your hottest ETF picks are!

This article is from Qiana Chavaia of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

7 Essential Truths for a Successful Retirement

Julie Rains — Mon, 03 Dec 2012 11:00:39 +0000

Whether you are in your 20s, 50s, or somewhere before, beyond, or in between, you may find yourself concentrating on the complexities of financial planning. While that effort may be valuable in weighing the advantages of a Roth IRA vs. Traditional IRA, mutual funds vs. ETFs, and more, too much analysis can thwart the task of seeing the forest as you focus on the proverbial trees.

As a result, you may unintentionally ignore the basics. Consider these seven essential truths that are the foundation of a successful retirement. (See also: 7 Tips for Stress-Free Retirement Investing)

1. Consistent Frugality Trumps (Attempts at) Great Investing

This truth comes from Jonathan Clements, former personal finance columnist for The Wall Street Journal who now works as the director of financial education for a large financial institution. In his years of interacting with readers and customers, he tells me that those who practice simple frugality routinely enjoy more prosperous retirements than those who pursue greater investment returns.

Obviously, great investing — getting a higher return rather than a lower one — is desirable. An earlier start and higher levels of savings, though, can trump higher returns. For example, if you set aside $5,000 per year and earn 5% per year as a 25-year-old, you will have more than $600,000 at the retirement age of 65 years; however, if you get investment returns of 8% per year but save just $3,000 annually and get a later start at 35, then you will have less than $350,000 upon retirement.

Clements’s stance is based on real-life observations, not just theoretical financial projections like mine. In his experience, putting energy and effort into diligent saving (even as an average investor) is more beneficial to a successful retirement than being a great investor.

2. Automation Is Your Retirement Friend

Automation helps you to avoid agonizing about investment decisions on a regular basis. This approach also helps you to avoid inaction and overspending.

You do have to set up the accounts, determine monthly contribution dollars, and select investments. But automation means that money will be diverted from your paycheck and checking account to investment accounts without further analysis and anguish.

Then, after paying bills, you are free to spend what is left in your checking account. You will have a solid mental picture of your discretionary income and won’t fool yourself into thinking that you’ll set aside retirement savings next month after you buy a few items on your wish list this month.

Over a working lifetime, you can amass wealth by automating contributions to several types of accounts.

401(k)
Roth IRA
SEP-IRA (if you have self-employment income)
Traditional IRA
Regular savings account (for shorter term needs, which helps to avoid borrowing from your 401(k) or taking money out of your Roth IRA)
Health Savings Account (if you have a high-deductible health plan that is HSA-eligible; savings not needed for health needs can be taken as income in retirement)

For guidance on the mechanics of automating your finances, check out these tips from Ramit Sethi, author of New York Times bestselling book "I Will Teach You To Be Rich."

3. Be Disciplined or Pay Someone to Keep You Disciplined

According to Clements, most people have the knowledge to save money and invest sensibly or can easily acquire the basic tools to prepare for retirement. However, they often lack the discipline to make rational decisions with their money.

You may understand the investment concept of buying low and selling high, or similarly, know how to shop for a bargain rather than paying full price for a designer outfit or digital gadget. Still, you might become overly excited and purchase an investment when its price is soaring or panic and sell off investments during a stock market decline. Such emotional reactions can be counterproductive to creating wealth.

A good financial advisor can not only design a portfolio of investments, but also keep you from buying high and selling low, calm your fears about risk, and encourage diligent saving.

In his novel "48 and Counting: A Story of Money, Love and Cycling," Clements provides a glimpse into the life of fictional financial advisor Max Whitfield, who manages $70 million of his clients’ money. He views his role in this way:

Max didn’t just manage a portfolio’s risk, costs and taxes. He also managed clients. In fact, that was how he spent most of his time…Keep clients invested when they were unnerved by plunging markets. Make sure they saved enough, didn’t go overboard on debt, bought the right insurance and had an estate plan.

So, if you find yourself routinely making bad financial decisions, even though you have the knowledge to make sound ones, consider engaging a financial advisor. And remember that the right person won’t advise you to chase a high-flying investment but will encourage you to take the necessary actions to build wealth over a lifetime.

4. Multiple Income Sources Can Prevent Disaster

We have heard many times, “don’t put all of your eggs in one basket.” And it’s true that diversifying investments is valuable to long-term financial planning. The idea is that a downturn in one area (say, the local real estate market) won't ruin you financially because you have other ways of making money (such as dividends from stocks).

In his book "How Much Money Do I Need to Retire?", Todd R. Tresidder, financial coach and former hedge fund manager, argues for diversification not only in terms of a diversified stock portfolio but among all assets that generate income. He states that:

...passive income must come from multiple, non-correlated sources. A reasonable mixture of TIPS, dividend paying stocks, income producing real estate, inflation-adjusting fixed annuities, and alternative investment strategies would satisfy that requirement. It’s also possible to mix in some passive business income, royalty income, Social Security income, pension income, and other sources...Never leave yourself exposed to a single default that can wipe out your financial security.

5. The Future Is Unpredictable

Most of us (including me) plan for the future based on how things have worked in the past. This approach can be useful if you consider that you will probably experience market downturns as well as upticks, have to deal with rising prices because of inflation or other causes, and pay taxes based on perpetually changing tax laws. So, planning based on uncertainty and unpredictability makes sense.

Making assumptions that the future will look precisely like the immediate past, though, is dangerous. As Clements explores in his book,

They [clients] couldn't accept that the future was unknowable and the past was a rotten guide to what lay ahead. They were betting their financial future. Chaos might be the reality, but it was emotionally unacceptable. So they assumed the future could be divined and that [financial advisor] Max had the inside scoop.

Several years ago, a financial advisor-sales consultant oversimplified the planning process and pretended that he could predict the future. He recommended that my husband and I invest a lump sum distribution in a certain set of mutual funds. He illustrated the future growth of our money based on the previous five years of fund performance. We didn't take his advice, but if we had assumed that the next five years would work exactly like the past five ones, then we would have lost a lot of money.

More sophisticated projections with longer timelines using average returns can also be misleading. Even though the average return of a 41-year-old portfolio may be 8%, you won't get a steady staircase of returns over this time frame but instead experience something akin to a switchback trail in which you move forward and backward as you make progress toward a goal.

Average Returns vs. Compound Returns

I found Tresidder's discussion about average returns vs. compound returns in his book enlightening. He explains that compound returns portray the reality of portfolio changes because they integrate market ups and downs. Note that compound returns are "always less than average returns because of the way money compounds. If you lose 20% one year and gain 20% the following year, your average return is zero but your account will actually lose money through compounding. In this example, your $100 account drops to $80 in the first year ((100 - (100 x .20)) = 80) and then rises to only $96 in the subsequent year ((80 + (80 x .20)) = 96)."

Understanding that returns (and the future) are uneven and unpredictable is essential to retirement planning.

6. Debt Can Weigh You Down

Debt in retirement could be manageable, but ideally, you should have no debt — not even a mortgage payment — when you retire. Sure, if your investments grow at a higher return than your loan interest rate, then the math may favor low-interest mortgage debt.

But the real problem with debt is that monthly payments increase your personal cost of living and may require you to spend down assets. You can't skip a mortgage payment in the same way that you might decide to forgo luxury seats at an NFL game to watch the game at a sports bar or skip dining at a fancy restaurant in favor of cooking at home. For example, you may need to:

Take greater distributions from retirement accounts earlier, slowing growth in account balances.
Accept Social Security payments or a pension earlier rather than later, possibly reducing the benefit amount.
Tap sources of income during a downturn, which may deplete your retirement balances.
Pay higher income taxes because you are generating more income from retirement distributions or other sources to cover your living expenses.

So, getting rid of debt prior to retirement can benefit wealth building and financial flexibility.

7. You Need a Plan for Meaningful Pursuits

Clements tells me that many people think of retirement purely as a time in which they will relax and enjoy time away from work. But absent goals and purpose, pure leisure becomes tiresome after a few weeks.

His book follows Max as he loses his wealth management firm in the aftermath of a midlife crisis, obsession with cycling, and extramarital affair. However, at 48, he becomes energized at the prospect of rebuilding a similar company.

Now that Clements brings up this topic, I can think of many people in their late 60s and 70s who have continued to work beyond the standard retirement age. Most, however, are not spending 40 hours each week at a traditional workplace. They are running a small business or doing some form of freelance work, such as selling artwork, coaching a high school sports team, organizing bus trips, or growing plants for sale.

Ken Eisold, Ph.D., elaborates on this idea of purpose beyond financial concerns. He says that, “on a personal level, those who keep working also often feel more useful and relevant. Unless retirees find stimulating and socially valuable activities, they undergo a kind of marginalization that makes it more difficult to maintain self-esteem and overcome depression.” So, when you are planning retirement, consider what challenges you’d like to tackle and not just the vacation home you want to have.

This article is from Julie Rains of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

Investing 101: 5 Essential Steps

Matt Bell — Wed, 20 Jun 2012 10:36:08 +0000

For many people, investing is the toughest part of personal finance. It can be confusing, intimidating, and with the recent recession still vivid in our memories, scary.

But it doesn’t have to be. Here are five steps everyone can take to invest well. (See also: 5 Killer Free Investment Tools)

1. Make Sure You’re Ready to Invest

You’re ready to invest once you’re out of debt except for your mortgage (of course, it’s fine to have paid off your mortgage as well, but you don’t have to wait until then) and have an emergency fund.

I also make an exception to my no-debt suggestion if your employer provides a 401(k) match. That’s such easy money, I’d hate for you to miss out. So if you can make accelerated payments on any debts you carry, have an emergency fund, and can contribute enough to your 401(k) to get the match, great. If not, get out of debt and build an emergency fund. Then start investing.

2. Figure Out How Much to Invest

There are lots of free online calculators available that can help you estimate how much you'll need to have in an investment account by the time you retire, and how much you'll need to invest each month in order to hit that goal.

One of the easiest-to-use calculators is on Fidelity’s web site (click on “myPlan Snapshot”). You may need to register on the site, but you won’t need to open an account.

3. Open an Account

If your employer offers a 401(k) or other type of retirement plan, this step should be easy enough. If not, consider opening a Roth IRA with an investment company like Vanguard, Fidelity, or T. Rowe Price.

With a Roth, there's no tax break for the money you put in, but any interest earned is tax free. Plus you can withdraw the money you contribute at any time with no penalty. You can even withdraw the earnings before you hit retirement age under certain circumstances.

4. Diversify Properly

You’ve probably heard that it’s important to diversify — spreading out the money you invest into different types of investments — and that’s true. It’s a way of managing risk. When one type of investment isn’t doing so well, chances are another type will be doing just fine.

One of the easiest ways to diversify is to invest in mutual funds instead of individual stocks. Mutual funds are inherently diversified because one fund typically invests in many different stocks, bonds, or other mutual funds.

But here’s the key point about diversifying your investments: How you diversify — how you divvy up your investment dollars between mutual funds that invest in bonds vs. those that invest in stocks, for example — is incredibly important. This is known as asset allocation, and it’s been found to be the single most important factor that determines your investment success.

In general, when you’re young, you can afford to take more risk, so your ideal asset allocation might call for 90-100% equity investments (i.e., stock-based mutual funds) and 0-10% bond funds.

One of the easiest ways to invest based on the proper asset allocation is to put your money in a target-date mutual fund. Such funds set the asset allocation for you based on your intended retirement age. They then automatically make the allocation more conservative as you get older.

Most of the big brokerage houses offer such funds, as do many workplace programs like 401(k) plans.

If you prefer a more hands-on approach, determine the right asset allocation for you (scroll down to “Investing” and click on “Asset Allocation Guidelines”). Then you could either choose your own mutual funds within the various asset classes and in the right percentages or work with an investment advisor to choose the right funds.

5. Get Started

Time is one of the most important ingredients for successful investing because it's what allows you to take the fullest advantage of compound interest.

In essence, compound interest is interest earning interest. Let’s say you invest $400 per month and get a 7% return. After 10 years, you will have invested $48,000, but it will have turned into over $69,000. Not bad.

Now let's give it more time. After 40 years, you will have invested $192,000, but your account will be worth nearly $1,050,000! That's the power of compound interest. Clearly, it’s important to start investing as soon as possible.

You Can Do It

Hopefully, this brief tutorial has taken away some of the confusion or fear that often surrounds investing. If you follow the steps above, you’ll be headed in the right direction

Have you taken these steps with your investments? What investment-related questions do you have? Let me know in the comments section.

This article is from Matt Bell of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

Best investment: yourself

Philip Brewer — Mon, 23 Jul 2007 16:08:15 +0000

I read a lot of investment books. I read mainstream books, where the author assumes the future is going to be a lot like the recent past, but I also like the "economic disaster" books where the author warns that something (government debt, globalization, inflation, energy crisis, stock market crash, real estate debt, hedge funds, derivitives, etc.) will send the economy off the rails. Their portfolio recommendations are so different (stocks, bonds and money markets versus gold, silver, and stockpiled food) that it's hard to find the right path. There is one thing, though, that's always a good investment: Yourself.

By investing in yourself I mean learning a skill. You might need to invest only some time, or you might invest some money as well for things like classes, books, and training materials. Any kind of learning might count, but I'm primarily thinking about learning:

A trade that people will pay you to do
A craft that lets you produce something people will buy
A skill that you can do yourself rather than pay someone else to do

To analyze this as an investment, look at the same three things investment analysts use: liqudity, return, and risk.

Liqudity has to do with how quickly you can turn your investment into money if you need it. You can't just sell a skill the way you can sell shares in a mutual fund, but that's actually one of the upsides of a skill as an investment--it doesn't get used up. If you learn a skill that people will pay you to do you can always generate some cash when you need to. Even one that just saves you having to pay someone else can keep cash in your pocket.

The return depends on the skill and the context. A completely new skill probably won't have as high a return as focusing on whatever skills you already have and maximizing their earning potential, but return shouldn't be analyzed in isolation and it's wise to do both.

Risk is where this investment really shines. Diversification of skills reduces your risk the same way diversification among other investments reduces risk. Good-paying jobs can disappear for a lot of different reasons: technology can automate the work or make it unnecessary; globalization can shift the work to lower-paid workers; a change in fashion can reduce the amount of that work the economy needs. Keeping your primary work skills up-to-date can help, but there's no complete insulation from the vagaries of the marketplace.

Skills not only give you flexibility in a changing marketplace, but they especially come to the fore during times of troubles. A skill can't be stolen, expropriated, or lost in a lawsuit. Nobody is going to default on it or declare chapter 11. You'll never have to leave it behind when fleeing a wildfire, flood, hurricane, or war. You can carry it across international borders and tell customs officials "nothing to declare."

It's worth having some stocks and bonds. But it's also worth having some skills besides the main one you use to earn a living. A little diversification there can get you through troubles where neither a mutual fund nor a safety deposit box filled with krugerrands would help as much.

This article is from Philip Brewer of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread: