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Jonathan Burton's Life Savings
Sept. 2, 2010, 12:01 a.m. EDT · Recommend (1) · Post:
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By Jonathan Burton, MarketWatch
SAN FRANCISCO (MarketWatch) -- Investing is complex rocket science that requires professional help -- at least that's what the professionals usually say.
But a strong case can be made for investors following a design principle known as KISS, which in this case stands for "Keep it simple, saver."
According to this principle, all you need are three diversified, index-tracking mutual funds or exchange-traded funds -- one for U.S. stocks, one for international stocks and one for bonds. The portfolio must be rebalanced at least once a year to ensure that half of the money stays in stocks and half in bonds.
The decisions you make just before retirement can have big consequences for your financial future. T. Rowe Price financial planner Stuart Ritter talks with Dow Jones Newswires reporter Veronica Dagher about some common blunders folks make on the verge of retirement.
It's boring and bland and won't score you any points at parties, but this bare-bones approach -- call it the "Nifty 50/50 Portfolio" -- has made almost as much money as a more aggressive, stock-heavy strategy over the past 25 years and topped it over the past decade.
Moreover, investors in this 50/50 mix would have had some insulation from stock-market swings. When global markets imploded in 2008, the 50/50 blend lost 17%, compared with a 31% decline for a portfolio with 80% stocks and 20% bonds.
"By moving to a 50/50 stock-bond position, you would not forsake that much in return [over 25 years], and it would have reduced your risk considerably," said Scott Kays, a financial adviser in Atlanta.
Because basic index funds are usually among the investment options in employer-sponsored retirement plans, the 50/50 portfolio is well-suited to people who primarily rely on a 401(k) or other retirement account to meet their long-term goals.
Many investors believe index funds' inherent low cost and infrequent trading give them a big advantage over funds run by active managers, whose never-ending quest to beat a benchmark often fails and usually leads to higher fees. While not everyone favors index funds or thinks a 50/50 mix of stocks and bonds is risky enough for them to achieve their investment goals, there's no denying that the Nifty 50/50's simplicity can be a virtue.
"Keeping it simple is the path of least resistance," said money manager Ted Aronson, whose Philadelphia-based firm, Aronson+Johnson+Ortiz LP, handles $18 billion of individual U.S. stocks for pension funds and other institutional clients.
Aronson spreads his own taxable money among an esoteric mix of stock- and bond-index funds, but he appreciates the 50/50 set up for its low-maintenance approach and for belting investors into their seats.
"There's less chance of acting imprudently and selling at a panic low or jumping on a hot spot at the wrong time," he says.
For a better understanding of how the Nifty 50/50 approach can lead to solid returns and a smoother ride down Wall Street, consider the results for two investment portfolios over the past 10, 15 and 25 years.
The first portfolio is the 50/50 combination, with 35% of assets in the Dow Jones Wilshire 5000 Index as a proxy for U.S. stocks, 15% in the MSCI EAFE Index to cover international stocks, and, for bonds, 50% to the Barclays Capital U.S. Aggregate Bond Index.
The second is an 80/20 mix that commits 65% to U.S. stocks, 15% to international stocks and 20% to bonds.
This analysis uses the returns of the indexes themselves and not investable funds or ETFs, because those portfolios weren't all available 25 years ago. Returns for fund investors would have been slightly lower because of fund expenses and other costs. (Continue reading for examples of funds and ETFs that investors could use today to create this mix.)
Jonathan Burton is the investing editor for MarketWatch and covers investing strategies and mutual fund-related news from San Francisco. He also writes the "Life Savings" column. Previously he held contributing editor positions at Bloomberg Personal Finance, Mutual Funds and Individual Investor magazines, and was a reporter with the Far Eastern Economic Review and Investor's Business Daily. He is also the author of two books on investing.
It was a strong August for the once-sleepy category.
1:17 p.m. Today1:17 p.m. Sept. 2, 2010 | Comments: 2
- Nickoo | 6:49 a.m. Today6:49 a.m. Sept. 2, 2010
"'Nifty 50/50' portfolio keeps investing simple http://bit.ly/cYHTFu" 11:17 p.m. EDT, Sept. 1, 2010 from MKTWBurton
"#Technology stocks ripe for #M&A: http://bit.ly/bcm7gS" 6:30 p.m. EDT, Aug. 27, 2010 from MKTWBurton
"#Bond buyers are killing the economic recovery: http://bit.ly/b0lj56" 6:17 p.m. EDT, Aug. 26, 2010 from MKTWBurton
"Robert Powell's Your Portfolio: What to buy instead of #bond funds: http://bit.ly/cgBPtm" 11:38 p.m. EDT, Aug. 25, 2010 from MKTWBurton
"Risky floating-rate #bond funds may send #investors adrift: http://bit.ly/9JgxU8" 11:37 p.m. EDT, Aug. 25, 2010 from MKTWBurton
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