Anthony and Robyn Pryor have developed a basic household budget, so putting money aside for their future is important to them. “Investing has been a top priority,†says Anthony, 32, an environmental consultant who lives in Fort Washington, Maryland. “I consider the money we use to fund our IRAs and our baby daughter’s college fund somewhat sacred. That’s part of our monthly non-negotiable overhead, along with rent, food, and utilities.â€
Anthony and Robyn, 27, a flight attendant in the Air Force, make monthly contributions to these accounts as well as regular taxable accounts. Their diligence has paid off. Their mutual funds were up in the 14% to 18% range last year, notes their financial adviser, Richard J. Peace, a certified financial planner with FSC Securities Corp. in Colorado Springs, Colorado. “The discipline that Anthony and Robyn have shown over the past few years has helped them during a time when others have been reluctant to make such a commitment.â€
While large numbers of skittish investors abandoned the stock market in recent years, the Pryors have been bullish. They placed 95% of their $80,000 in holdings in equity funds that include American Funds EuroPacific Growth Fund (AEPGX), American Funds Fundamental Investors Fund (ANCFX), American Funds International Growth and Income Fund (IGAAX), American Funds Global Growth Portfolio (PGGAX), and American Funds Growth and Income Portfolio (GAIOX).
Many investors are still shell-shocked after the stock market crash and economic downturn of late 2008 to 2009. Brave souls like the Pryors, who stuck with stocks, have been amply rewarded. In March 2013, the benchmark Standard & Poor’s 500 Index was around 1,550, up more than 125% from its low four years earlier. The Dow Jones industrial average was at a record high, well above 14,000, validating the courage of investors who stayed in the market despite days such as the one that produced a 216-point loss in early February.
Bouncing back, in fact, is something that stocks have been doing for decades. Even before the bear markets of the 21st century, the U.S. stock market has endured a lot–world wars, numerous recessions, and innumerable crises–and still delivered solid returns. According to Morningstar, large-company U.S. stocks have produced annualized returns of nearly 11% for the past 30 years, through 2012. Going back to 1926, to include the Great Depression, annualized returns are around 10%.
“Over the long run, stocks have outperformed every other investment,†says John W. Rogers Jr., chairman, CEO, and chief investment officer of Chicago-based Ariel Investments (No. 7 on the BE Asset Managers list with $4.4 billion in assets under management). “As Warren Buffett has said, ‘The capitalist democracy in which we live today is the best system ever invented.’ A resilient economy is likely to produce increasing profits for corporations and higher share prices for investors.â€
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According to Rogers, you should invest in companies that you think will have products to sell 20 to 30 years from now. “Be sure to invest in companies that have a strong moat around them,†he says, meaning an advantage over competitors, “and will continue to have this moat many years from now. In addition, you have to stay the course in order to benefit from investing in the stock market.â€
The Pryors combine the tactics on the following page in their pursuit of long-term wealth building. “Turmoil in the markets is unsettling, but I try not to react,†says Anthony. “If I kept moving money around, in response to all the headlines, I’d probably do worse than by staying the course. We know that we won’t have enough money for our retirement unless we keep putting something away.â€
To help you stay invested, bad times or good, you should have a strategy. Here are five ways to help you stick with stocks for long-term success:
1. Dollar-cost averaging
This term refers to the process of making periodic investments of fixed amounts, perhaps every month or every quarter. As prices fluctuate, you buy more shares at lower prices and fewer shares at higher prices, resulting in a lower overall cost-per-share. In fact, most mutual funds such as Dodge & Cox Stock Fund (DODGX), PRIMECAP Odyssey Aggressive Growth Fund (POAGX), and Artisan Small Cap Value Fund (ARTVX) can be set up as automatic investment accounts. “Dollar-cost averaging is the best way to invest,†says Rogers. “It’s better to put money into a 401(k) plan every month, as opposed to once a year.â€
2. Asset diversification
In 2008, the financial crisis drove down the average domestic stock fund by about 38%, according to Morningstar. An investor with a portfolio 100% in stocks would have needed to gain more than 60% after that just to get even. By comparison, general bond funds fell less than 4% that year, while government bond funds gained almost 8%. An
If you don’t want to manage your own asset allocation, you can invest in a so-called target date fund. If you’re about 20 years from retirement, for example, you might pick a fund with a 2035 target date. “Target-date funds have been great inventions,†says Christine Benz, director of personal finance at Morningstar. “These funds can provide investors with an appropriate asset allocation for their time horizon, and they automatically change the mix to become more conservative as the target date approaches.†As an investor nears retirement, these funds hold fewer stocks and more bonds. One of the top-performers is Schwab Target 2030 Fund (SWDRX).
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3. Dividend-paying stocks.
Rogers says that companies paying dividends have rewarded investors. Payouts are relatively high in these low-yield times, and dividends can grow if the company prospers. In bear markets, a regular dividend may provide downside protection.
You can pick your own dividend-paying stocks or invest in a fund that holds multiple dividend payers. “We prefer dividend-focused funds that buy companies that increase their dividends, rather than funds that have the highest dividend yield today,†says Benz.
The following represent stocks with high-dividend yields AT&T Inc. (T), Williams Partners L.P.
(WPZ), and Duke Energy Corp. (DUK).4. Tax-advantaged opportunities.
Most employer-sponsored retirement plans offer immediate tax savings because the money you contribute is not subject to income tax until it’s withdrawn. “I contribute enough to my company’s 401(k) to get the maximum employer match,†says Anthony. That gives him more money to accumulate, tax-deferred, inside the plan.
“Anthony and Robyn also maximize contributions to Roth IRAs every year,†says Peace, the Pryors’ financial planner. “Young people might face higher tax rates by the time they retire, so they’ll benefit from tax-free income.†Roth IRAs offer no initial tax savings, but withdrawals on the principal are tax- and penalty-free after five years; withdrawals on the principal and earnings are tax- and penalty-free as long as you are at least age 591/2. To make sure taxes don’t take a bite out of your return, review these offerings: SEI Institutional Managed Trust Tax-Managed Large Cap Fund (STMYX), USAA Growth and Tax Strategy Fund (USBLX) and Eaton Vance Tax-Managed Value Fund (EATVX).
5. Low expenses.
Over the long term, paying less to your mutual fund managers is one sure way to increase annualized returns. Morningstar puts the average expense ratio of domestic stock funds at around 1.25%, or $125 each year for every $10,000 of fund value. See if you can find funds with good strategies and excellent track records, along with lower expenses. Among the funds that offer solid returns with low-expenses are Vanguard PRIMECAP Core Fund (VPCCX), Osterweis Fund (OSTFX), and American Beacon Large Cap Value Fund, Investor Class (AAGPX).