October 20, 2016
It’s been a great stretch for investors. Stocks have gained more than 250% in the bull market that stretches all the way back to 2009.
I am always a big believer that dollar cost averaging-investing on a regular basis-is a great strategy for long-term investors. So don’t take what I am about to say as a reason to give up on stocks: Returns over the next seven to ten years probably won’t be as good as what we’ve had the past seven years. That’s just the ebb and flow of investing; now that stock values are much higher, there is less reason for stocks to continue to outperform. Again, I want to be very clear: if your investment goals are at least ten years into the future, you want to stay committed to owning stocks. Over time they are the best opportunity to earn inflation adjusted returns.
That said, the best investment move you can make right now is to cut the cost of investing:
Lower the Fees You Pay on Your Funds. Yes, this is always an important step, but it becomes extra important right now. All mutual funds and exchange traded funds charge an annual fee called the expense ratio that is deducted from your fund’s performance. If your stock portfolio earns 10% and it has an annual expense ratio of 1%, your account only grows by 9%.
Sure, 9% is still pretty great. But what if your stock fund earns 5%? If the expense ratio is 1%, you earn only 4%. That’s a 20% reduction in your earnings! If your fund earns 1% and you owe 1% in fees, you’ve just wiped out your gain. And in down markets, you keep paying the expense ratio, so the more expensive your fund or ETF, the bigger the hit.
So here’s the thing: It has never been easier to own funds and ETFs with super-low expense ratios. Investment firms such as Vanguard and Fidelity have many options that charge 0.10 percent or less. If you invest through Schwab, it has ETFs that charge less than 0.05% Discount brokerages such as TD Ameritrade offer a lineup of ETFs that include plenty of options with expense ratios below 0.10%, and that TD Ameritrade waives the commission on.
If your portfolio is full of investments that charge 1% or more, I am telling you that the best move to make today-and that will pay off for the rest of your life-is to focus on lowering your costs. Paying less in fees means keeping more of your money growing for your future. And that’s extra important for the times when market returns are low, or even negative.
If you invest in tax-deferred accounts such as IRAs, or a 401(k), you can move your money into new funds without having to pay any tax. For regular (taxable) accounts you need to be careful, as any exchange means owing tax on gains from the fund you’re leaving. If you don’t have any investments with losses that you could also sell to offset the gains, then just focus on making all your new investments in low cost funds.