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3 ways to earn more
Taking these steps can free much more of your money for more productive uses:- Load up on small and midsize stocks, both domestic and foreign. Small stocks are out of favor at the moment because they are particularly sensitive to the economy, and it is weakening. That just means they're on sale. Over long periods they outperform big-company stocks by around three-quarters of a percentage point annually. Midcaps are not on sale at the moment, but they seldom are. Over the past 15 years they've outperformed small caps by 1.2 percentage points annually -- and big caps by nearly 2 points.
- Go foreign, and the stranger the better. Over the past five years the MSCI EAFE developed-market foreign-stock index surged an annual average of 21.3% -- nearly 10 percentage points per year more than the S&P 500. Emerging markets soared 32.7% per year. Emerging markets have emerged to the point that Mexico and Russia are investment-grade credits. This isn't performance-chasing; it's globalization.
- Go alternative. That is, embrace securities that are independent of stocks and bonds. The two kinds most commonly available in 401(k) plans are energy and real-estate funds. These two groups, plus gold, another alternative, make up 13.5% of my personal portfolio. Agricultural commodities would be even better, but few plans offer exposure to them.
These three categories -- small, foreign and alternative -- account for 64% of my retirement portfolio, with the balance devoted to domestic big caps, bonds and cash. (And I own not a single S&P 500 Index fund.) What most folks ignore have garnered me outstanding returns for years.
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The single largest risk to a retirement portfolio is that it won't be big enough to support you through many years of vigorous life after you retire. It not only has to furnish income -- it has to keep up with inflation. That requires returns in retirement of at least 8% annually and returns before retirement of substantially more.
Consistent returns of that magnitude are not unachievable; they are what securities markets have historically provided in a diverse blend of somewhat risky and very risky constituents. But you won't get them from a target-retirement fund. It is designed to deliver average returns of 8% over its entire life. You can do better on your own. And you need to.
Published Jan. 3, 2008
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