Riskier, High-Growth Investments
The risk of market declines should be obvious after the financial crisis. But keep in mind that since 2009 the major stock market indices have doubled — and have started to set new highs. Looking at the long-term performance of stocks, the trend is invariably upward … but you have to be prepared to let your investment ride and not punch out too early. That’s why as you age and as the need for capital increases, you shouldn’t be as exposed to risky investments because you may have to record a steep loss to free up cash for the bills, and then miss out on the rebound a year or two later.
If you have the money and patience to let your cash ride in a riskier investment over the long term, here are some tactics:
Index funds: Study after study proves that active management stinks. Why pay a boatload in trading fees and high-priced research tools only to lag the market anyway because some hifalutin trader picked the wrong stocks to buy? There are a host of low-cost index funds out there that give you built-in diversification to smooth out your performance. For instance, the very popular SPDR S&P 500 ETF (NYSE:SPY) gives you a little bit of the 500 stocks that comprise the well-known Standard & Poor’s index … and charges a mere $1 annually for every $1,000 you invest! You get built-in diversification across 500 of the biggest corporations on Wall Street at a great price.
Buy-and-hold dividend stocks: Over the long term, dividend-paying stocks are a powerful way to grow your portfolio or provide regular income. These investments deliver quarterly payouts to you simply as a way of saying “thanks for investing!” These dividend payers can deliver 3%, 4% or more each year in dividends alone — so even if shares don’t budge, you get a better return on your initial investment than in bonds. The risk, of course, is that if shares slide your dividends will be offset by losses in your investment. But if shares go up, you get paid twice. And if you don’t want to pick individual winners or if you want to focus on diversification, you have plenty of dividend-focused mutual funds to choose from.
Junk bonds: High-yield bonds are in favor right now because they deliver nice annual returns, sometimes as high as 6%. But this kind of debt is called “junk” for a reason — because the borrowers don’t have a very good track record or have risks that could prevent them from making payments. I would never advocate picking individual junk bonds, but some diversified mutual funds in the space allow you to spread your risk across a host of borrowers to offset any bonds that go bad. A good example is the Eaton Vance Income Fund of Boston A (MUTF:EVIBX), run by veteran portfolio manager Mike Weilheimer. Weilheimer has been watching the bond market since the late 1980s and knows what borrowers to avoid — fueling 9% returns on average across the past decade. Just remember that past performance is no guarantee of future success, of course.
One final note: Only you know what your retirement goals are, what your risk tolerance is, and what asset classes are best for you. I strongly advise that you do some research on all of these areas, and then that you consider spending a day with a registered investment adviser or some other financial professional who can create a custom plan.
There is no magic bullet here, and there is no sure thing. But arming yourself with information and teaming up with a financial professional can help you craft a plan to get ahead in the long term.
Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at email@example.com or follow him on Twitter via @JeffReevesIP. At the time of publication, he had no positions in the securities mentioned.