Wednesday, March 16, 2016

Managing your 401(k) rollover -- stay in boring stocks, leave them alone

"Never buy anything from someone who is out of breath," Burton Malkiel, (1932 -   ), author of "A Random Walk Down Wall Street."

It is one thing to save enough money to retire and yet another to confidently live on that savings as long as possible into your last years. Two key questions come into play: What earnings can you expect from your 401(k) rollover investments to help pay the bills and what are the management fees taking a bite out of those savings?

With baby boomers by the tens of thousands retiring every day as they mark their 65th birthdays, the burning question is how to how to manage your retirement savings for the long haul.

Here are few facts to inform your investment strategy:

-- Last year (2015), 66 percent of large-cap stock mutual fund managers underperformed the S&P 500. And according to a semi-annual SPIVA score card produced by McGraw Hill Financial, over the five-year period ending Dec. 31, some 84 percent of large-cap managers failed to beat the S&P 500, an index of the 500 largest publicly held companies in the U.S. Actively managed mid-cap and small-cap funds also lagged the S&P over the same time frames. Your funds DID NOT keep up with the broader market.

-- According to research at The Motley Fool, the average expense ratio (percentage of a fund’s assets going to operating costs) for an actively managed mutual fund is about 1.5 percent a year. That means that even if shares in the mutual fund decline or struggle to gain altitude, fund managers are taking a 1.5 percent annual pay check from the assets rain or shine. Bill Barker, writing for Motley Fool, suggests that as time goes by “you as a potential or actual mutual fund investor should be aware that it is likely going to become more and more expensive to own an actively managed mutual fund.”

-- On average, the S&P 500 stock index has produced a 10.3 percent return each year from 1957 through 2003. The return includes both dividend payouts and increasing stock prices. But last year, plunging oil prices, the strengthening U.S. dollar and China’s slowing economy contributed to a lackluster year for stocks. The S&P 500 produced an anemic 1.5 percent total return over 2014. So in a year with meager increased stock valuations and a mutual fund expense ratio of over 1.5 percent, you would only be breaking even or losing ground.

-- Financial advisers often suggest moving your savings into “safe” investment categories as you approach retirement. That typically has meant getting away from stocks and into bonds. But as the Federal Reserve raises interest rates (which it is doing), your bond fund investments will likely lose value. So beware of this outdated advice. And be particularly aware of funds with an upfront “load” or commission that comes off the top before your money actually even starts making any return. For more, click here.

What sectors have done the best best over the past couple of decades? In the stock arena, consumer staples businesses – companies that produce always-in-demand household necessities such as toilet paper, soap and toothpaste – did the best while high-flying technology companies did the worst.

So how do you handle that rollover? Keep in mind that a boring investment portfolio is a good thing. That buying and holding may be the best strategy and that successful investing is not so much about picking winners but staying the course. Patience and discipline can be rewarding. "The key to making money in stocks is not to get scared out of them," said Peter Lynch, author of "One Up on Wall Street."

As we head into another chaotic year, what advice do the experts have for managing your rollover retirement savings?
Plan your household retirement budget with minimum withdrawals from your retirement nest egg, say in the 2 percent range. Keep a sharp eye on mutual fund expense ratios and remember that a low-cost S&P 500 stock index fund with minimal management fees will likely beat most actively managed funds with higher management fees.

Take a look at reliable but boring companies selling consumer staples as a long-term earnings opportunity. Avoid turnover in your portfolio. Expect to be uncomfortable with the ups and downs of markets.

Even if you have a trusted financial adviser, educate yourself on basic investment strategies. Here are some reading recommendations:

“A Random Walk Down Wall Street,” by Burton Malkiel.
“One Up on Wall Street,” by Peter Lynch.
“The Future for Investors,” by Jerry Siegel.
“Irrational Exuberance,” by Robert Shiller.

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