For the 70th-anniversary issue of Kiplinger's Personal Finance, we distilled our best advice to show you how to build, protect and enhance your wealth throughout your life. Start with these proven investing tips to help boost your portfolio:
Open a Brokerage Account
Once you've established a bank account and started to participate in your employer's retirement savings plan, take your wealth-building program to the next level by opening a brokerage account. That will allow you to invest in individual stocks and exchange-traded funds, which most people can't do in their 401(k), as well as no-transaction-fee mutual funds. You'll need $2,500 to open an account at Fidelity, our top-ranked online broker; Charles Schwab requires just $1,000, which is waived if you sign up for automatic monthly deposits of at least $100.
Keep Investing Costs Low
All else being equal, the less you pay, the more you get to keep for yourself. Start by opening an account with an online broker, such as Fidelity or Charles Schwab (see Best of the Online Brokers). You'll be able to buy and sell stocks for roughly $7 per trade. In addition, many of the top discounters let you trade select ETFs without sales fees. Fund investors should focus on mutual funds and ETFs with low expense ratios. You can buy index funds, such those that track the S&P 500, with annual fees of roughly 0.05%. Top low-cost actively managed funds include Dodge & Cox Stock (DODGX) and Mairs & Power Growth (MPGFX), both Kip 25 members.
If you work with a money manager, you'll probably pay about 1% a year. Try to negotiate a lower fee. Or consider signing up with a "robo" adviser, which uses technology to manage your portfolio. Betterment charges just 0.25% of assets under management annually. Wealthfront levies no management fee for balances under $10,000 and charges 0.25% a year for any amount above that.
Target Your Investing
Target-date funds, which are widely available in 401(k) plans, are designed to be set-it-and-forget-it investments. They are best for investors who aren't sure how to invest or don't want to bother figuring out how much of their portfolio should be in stocks or bonds or when to rebalance. In a target-date fund, the pros do the work for you, shifting the stock-bond mix to a more conservative allocation as you get older and even after you retire. Choose the fund with the year in its name that matches when you plan to retire. Our favorite target-date series are Vanguard Target Retirement, which holds index funds, and T. Rowe Price Retirement, which holds mostly actively managed funds. If you're 18 years from retirement, for example, go for Vanguard Target Retirement 2035 (VTTHX).
The best way to build wealth over the long haul is to invest in stocks. U.S. stocks, as measured by Standard & Poor's 500-stock index, have returned about 10% per year compounded. Stocks are notoriously fickle and volatile over the short term, and after their long ascent, they are due for a breather or possibly a full-fledged bear market. But with interest rates still in the gutter, stocks will almost certainly outpace bonds and cash-type investments (for instance, savings accounts and money market funds) over the next decade and beyond. Start investing with low-cost exchange-traded funds, such as iShares Core S&P 500 (symbol IVV), which tracks the S&P 500, or Vanguard Total Stock Market (VTI), which follows a benchmark that includes nearly every U.S. stock. You can rev your engines with a sector ETF, such as Vanguard Information Technology ETF (VGT) or Guggenheim S&P 500 Equal Weight Health Care ETF (RYH). But don't invest money you'll need soon.
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Invest to Beat Inflation
Kiplinger expects inflation for 2017 to be a still-modest 2.4%, up from 2.1% in 2016. That's nowhere near 1970s-style runaway levels, but it's enough to merit some inflation protection in your portfolio. One good option: Treasury inflation-protected securities (TIPS). The principal value of TIPS is adjusted to keep pace with increases in consumer prices. Buy TIPS directly from Uncle Sam at www.treasurydirect.gov. Another inflation fighter is Fidelity Floating Rate High Income (FFRHX), which invests in loans that banks make to borrowers with below-average credit ratings. The interest rates adjust periodically in response to changes in short-term rates, which are likely to rise as inflation accelerates. Commodities should also perform well as inflation heats up. For exposure to commodities, consider Harbor Commodity Real Return Strategy (HACMX). For more on staying ahead of inflation, see Inflation-Proof Your Assets.
Spread Out Your Investments
Playing it safe with a diversified mix of stocks and bonds can help your portfolio stay afloat during bad times and improve your long-term returns. If you have at least 10 years until retirement, for example, hold 70% of your portfolio in stocks and 30% in high-quality bonds. A mutual fund can work nicely, too. Vanguard Wellington (VWELX), a member of the Kiplinger 25 (the list of our favorite mutual funds), holds about two-thirds of its assets in stocks and the rest in bonds, and it has an annualized 8.2% return over the past 20 years.
Give Emerging Markets a Shot
Before delivering modest gains in 2016, stocks in developing markets, such as China and India, had lost money in four of the previous five years. But emerging-market stocks still deserve a place among your assets. Not only are the stocks relatively cheap, but corporate earnings in emerging-markets firms are expected to expand by more than 13% in 2017--far more than firms in the U.S. For access to these stocks, invest in Baron Emerging Markets (BEXFX), a Kiplinger 25 fund, or in exchange-traded iShares Core MSCI Emerging Markets ETF (IEMG), which tracks an index.
Take a Flier on Small Stocks
After you've stashed money in an emergency fund and maxed out contributions to retirement accounts, consider taking a moonshot on stocks that could turbocharge your returns. Small, fast-growing companies may be a good bet now because small companies should benefit from a focus on the healthy U.S. economy, and they could get a lift from fewer regulations and lower corporate tax rates now being considered in Washington. Two top choices: T. Rowe Price QM U.S. Small-Cap Growth Equity (PRDSX) and T. Rowe Price Small-Cap Value (PRSVX), both members of the Kip 25.
Don't Try to Time the Market
Wondering if it's time to sell all of your stocks? Don't. First, what are you going to do with the proceeds? Cash pays almost nothing, and bonds come with their own set of risks. And how will you know when it's time to get back in the market? Our advice: Set an appropriate allocation, then rebalance.
You'll need to trim your winners periodically and add to your laggards to keep your mix intact. Check your brokerage statements every six months to see if your portfolio has veered off track. If your allotment to a particular category has drifted by more than five percentage points from your target allocation, make the needed trades to bring your allocations back into alignment.
Tweak Your Investments
As you approach retirement, aim for a portfolio that generates enough growth to combat inflation but ratchets down risk. A mix of 55% stocks, 40% bonds and 5% cash accomplishes that goal. For more growth, adjust the mix to 60% stocks and 40% bonds and cash; for less risk, go with 60% bonds and cash and 40% stocks.
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Copyright 2017 The Kiplinger Washington Editors