(Money magazine) -- Making real money today is a challenge, whether
you're just starting out or already have a strong financial foundation.
Shop for discounts. Value
investing (buying beaten-down stocks that are poised to rebound) tends
to outperform growth investing (buying firms with rapidly increasing
earnings).
From 1928 to 2011, U.S. large value stocks delivered
10.8% average annual returns, vs. 8.7% for their growth counterparts.
This strategy requires guts and patience.
"You're taking the
other side of trades made when people can't wait to get out," says Wally
Weitz, manager of Weitz Partners Value (WPVLX).
And there are long stretches where the category lags, like the past 10 years. Feeling brave? See three stocks Weitz likes.
Buffer against losses.
Covered calls can boost long-term returns up to 20%, University of Utah
finance professor Robert Dubil found. You sell an investor the right to
buy a stock or an ETF you own should the shares rise above a set price
within a set time. The cash you pocket cushions losses if the stock
falls. But if it never hits the strike price, you keep the money and the
shares.
Be a cheapskate. The surest way to improve returns? Minimize investing expenses.
Index funds and ETFs are a good way to go: Vanguard Total Stock Market (VTSMX) charges just 0.17% vs. 1.4% for the typical actively managed stock fund.
Growth of $100,000 after 20 years, with 7% annual returns:
- Fund with 1.4% expense ratio: $297,000
- Fund with 0.17% expense ratio: $375,000
Go abroad for stocks. Despite the widespread slowdown, the economies of many countries are likely to outpace the U.S over the long run.
"For
those who can stand the bumps, emerging markets are likely to grow
faster than developed markets; and Europe, now selling at a 30%
discount, will eventually come back," says RegentAtlantic investment
adviser Chris Cordaro.
... And do the same for bonds. The average yield for emerging-market bond funds is 5.4%, more than triple the current yield on a 10-year Treasury note.
Sound
risky? Many emerging-market economies are in better shape than the U.S.
and Europe; emerging markets also have better growth outlooks.
Shift 5% to 10% of your bond portfolio toward them through T. Rowe Price Emerging Market Bond Fund (PREMX), which has a 6.4% current yield, suggests Jeff Layman, chief investment officer of BKD Advisers.
A Money magazine reader weighs in: Go with what you know.
"I
buy stocks only in companies whose business I can easily understand.
This served me well with Electronic Arts (I'm a gamer), Crocs (wear them
all the time), and several railroad companies (I think fuel prices will
make rail transport more popular)." -- Kevin Banks, Dunwoody, Ga.
Become a landlord. It's now cheaper to buy homes than rent in 98 of the top 100 metro areas, Trulia.com reports.
"And
the outlook is that we're more likely to see appreciation in the next
one to five years," says Frank Nothaft of Freddie Mac. Plus, you can see
returns of 5% to 10% from rent over a five- to 10-year hold, says
Robert Griswold, co-author of "Real Estate Investing for Dummies"
Favor dividend growers. Most income investors today are focused on current yield.
A
better metric? Dividend growth. Companies that consistently raise
payouts outperformed those that don't by 1.4 percentage points a year
over the past five years, Ned Davis Research found.
Get growth through SPDR S&P Dividend ETF (SDY), which tracks stocks that hiked yields every year of the past 25.
Get a hunk o' junk. Total bond market indexes don't include high-yield bonds, which are less sensitive to rising interest rates than other debt.
Junk bonds are also delivering 7.8% yields right now, 6.5 percentage points higher than a 10-year Treasury.
Investment adviser Jeff Layman suggests putting 10% of your bond allocation into them via Artio Global High Income (JHYIX), which is yielding 7.5%.
Hedge inflation.
Keeping too much in cash could leave you behind consumer-price
increases, particularly with interest rates on savings at 0.13%.
I-bonds
can protect you. Rates adjust twice a year based on the CPI. "And
you're guaranteed to at least match inflation," says Boston University
econ professor Zvi Bodie. The current rate is 2.2%. You can invest up to
$10,000 a year via TreasuryDirect.gov.
Cherry-pick big growers. The core of your portfolio should be stashed in funds that give you access to all areas of the market.
The
typical way to go for more growth is to invest in the stocks of smaller
companies, but those look overpriced today, says GMO chief investment
strategist Jeremy Grantham.
Big blue chips, on other hand, look
like decent values. Here are four favorites from Larry Puglia, manager
of T. Rowe Price Blue Chip Growth (TRBCX), that are expected to increase their earnings at a decent clip. (See 7 stocks to rev up your portfolio)
Be passively aggressive.
As the graph above shows, few actively managed funds consistently beat
their benchmarks. That means for a diversified portfolio, you'd to have
to pick right a bunch of times. Good luck with that. Instead, put the
bulk of your money in index funds and ETFs from the MONEY 70 that cover the market, then invest the rest in managers you think have the goods.
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