When it comes to investment advice, doesn’t get much better than what you’re about to read. Seriously.
These days all of us could use some sound investment advice.
A lot of people are either kicking themselves or scratching their heads when it comes to the stock market and their retirement savings. We all celebrated when the stock market reached a record high of 14,164 in October 2007 and how much portfolios had rebounded since the dot-com bubble burst and economic downturn after the September 11 terrorist attacks.
A lot of people panicked when the market fell to a 12-year low of 6,547 in March 2009 and by then some had already removed cash from the market and didn’t want to risk any more until they saw recovery. Others opted to stay all in and wait out the decline, knowing the market always recovers in time.
But with the market hovering around 17,000 these days, many investors, including those who stayed in and others who jumped in to ride the wave are wondering why they haven’t done as well financially as the market as a whole. How did they miss out on the gains?
“If you ask somebody coming off the last decade, most people don’t think they’re diversified enough and, in actuality, I haven’t come across a portfolio that was under diversified,” says Ben Beck, co-founder of Boston-based Beck Bode Wealth Management. “What I see is their money is too spread out. What happens is they end up diluting their future returns and future income and they don’t benefit from the times we have seen over the past five years.”
In essence, people have been way too conservative with their investments with diversification when they only need between 15 and 30 securities to be diversified, Beck says. Some people have mutual funds that have 100 to 125 securities of stocks and bonds.
“There’s this notion that you have to have exposure to all these different parts of the economy and that’s not the case and that ends up hurting you more than helping you,” Beck says.
For those in their 50s and 60s, Beck says people should have investments in “more than a few” of the ten major sectors and they should focus on companies that are expected to grow their dividends in the next 12 months.
“A 60-year-old who’s retiring needs their money to be sectors that are conservative such as utilities, but sectors where the income generated by these securities is expected to grow,” Beck says. “You have funds that talk about how they have grown their dividends for the past 15 years—the blue chips of the world. That’s good, but what’s the company going to do over the next 12 months. That’s what you need to focus on.”
That would include investing in electric utilities, real estate investment trusts and oil and gas pipeline companies where Wall Street expects them to grow over the next year, Beck says.
“The focus is on making sure there’s a consistent income stream of dividends and more importantly to have a income stream that has the best opportunity to grow that as time moves along,” Beck says.
A lot of people are missing out on the gains on Wall Street simply because of fear of what’s happened in the past with such declines as the dot-com bubble burst and The Great Recession.
A recent survey from Wells Fargo shows that nearly three in ten people say they are “cautiously avoiding stocks in their long-term investments” because they don’t want to take the risk. Most of that fear was among those with less than $100,000 in investments versus those with more income.
Of the 29 percent of investors who say they avoid stocks, less than half say they feel confident they can reach their goals without stock market exposure but they avoid the risk anyway.
“More often than not folks need to be justified by a number of years of positive markets before they get back in. All of a sudden we go through a bear market and it almost feels like to some folks that it’s a vicious circle,” Beck says. “They take a break from investing and it repeats itself where numerous studies have been done that if you keep your money invested—and it’s based on a reasonable strategy and you have patience—you should be able to ride out in the long run the ups and downs of the market.”
Because of that fear, Beck says he has come across people with millions of dollars invested only in bonds and certificates of deposit that have an average yield of less than three percent. When someone is earning $30,000 a year in ten-year bonds, that’s not taking the right strategy to look at what money is worth in the future, he says.
“Look ten years down the road and take a realistic point of view,” Beck says. “By putting money in fixed vehicles, you might feel safe right now what does that mean personally ten years from now given you know your electric bill will be higher, that phone bill will be higher, food costs will be higher, health care costs will be higher and maybe taxes will be higher.”
Even those with a limited amount of money saved for retirement and those who are just getting started in their 50s shouldn’t fear the market and can start investing right away, says Jim Bode, a managing partner at the firm. It’s never too late to start because the goal in saving and investing is the not the next five to ten years, he says.
“If you’re in your 50s and all of a sudden you realize that you haven’t done your job, save $50 a month and see if you can increase it to $100 a month,” Bode says. “For a lot of people $50 might be a real stretch without realizing over the next 5 to 10 to 15 years that $50 might actually be worth $20,000 to $30,000 depending on how aggressive you can save and how you do with investing.”
The idea that it’s never too late to start is important, Beck says, because someone 55 today has a good chance to live to 85. Even though people will have to work longer to prepare for their retirement, they can still improve their position.
“If it’s not their 50s that’s so bright, they can be make their 60s and 70s where they have more money in their pocket,” Beck says.
But with study after study showing many people in their 50s have saved very little for retirement or haven’t started at all, there’s going to be challenges for starting late.
“It’s not truthful to say they’ll have the retirement of their dreams, but I do think you can better your situation,” Bode says. “Everybody’s best friend is time and the time to get started is immediately.”