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Maximize Your Returns with
High-Yield Retirement Funds |
Published: November 19,
2007
If you've ever sold a stock on
its way down, only to watch it rally once you tossed it, keep reading.
You know you're not supposed to panic when a stock starts falling, but
knowing why may help.
Research shows that riding out the market's volatility leads to greater
returns than panic selling or chasing after the hottest trend, but most
investors don't believe that. According to equity research firm I.G.
Investment Management, the average investor held a stock for five years
back in 1975, versus just 10 months today. Mutual funds are treated with
the same impatience. In 1996, the average holding period was five and a
half years. By 2002, that was cut to two and a half years.
Here's the problem: you tend to
earn far less with short holding periods and high portfolio turnover.
Besides reducing your brokerage fees, longer-term investing lets you
enjoy the magic of compounding -- earning returns on reinvested
dividends and capital gains.
I.G. Investment Management
found that the average stock fund earned compounded annual returns of
+11.5% over a time span of 17 years. Unfortunately, the average investor
held the funds for less than three years and captured compounded returns
of just +4.2% along the way. Put another way, the average investor lost
63% ((11.5 - 4.2%)/11.5%) of his/her potential returns by getting
impatient.
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A recent study by research firm
Dalbar entitled 2007 Quantitative Analysis of Investor Behavior
comes to the same conclusion. Dalbar found that most investors earn far
less than a fund's five- or ten-year average annual returns because they
don't hold the fund that long. In fact, buying into an investment using dollar
cost averaging over 20 years will give you +40% higher returns than
if you simply held that investment for just a few years, the study said.
(Dollar cost averaging involves the purchase of small blocks of shares
at different prices over an extended period of time.)
The good news is certain types of funds are specifically designed for
long-term investing. These "asset-allocation" or
"retirement" funds include a range of different types of target-date,
lifecycle or balanced funds. Whatever their name, they all
seek to maximize long-term returns for a given level of risk by
carefully balancing the portfolio between stocks and bonds.
A target-date fund like Vanguard Target Retirement 2010 (VTENX), for
example, is designed for investors nearing retirement in 2010. It can
also be used for sending a kid to college, buying a boat, or for any
other purpose. You can hold the fund until it "matures" to its
most conservative investment profile, or you can cash out at any time.
A fund like VTENX is really a "fund of funds." It invests in
other stock and bond funds managed by Vanguard. Between now and 2010,
the fund managers will rebalance the portfolio periodically, making it
increasingly more conservative in an effort to protect your principal as
the final year approaches. More aggressive growth stocks will give way
to high-grade bonds, preferred shares, and blue-chip dividend payers
that pay a secure income. Today, for example, the fund is weighted 55%
to stocks and 45% to bonds, but after 2010 it will move closer to a 30%
stock/70% bond allocation like that employed by Vanguard Target
Retirement Income (VTINX).
Life-cycle funds like T. Rowe Price Personal Strategy Balanced (TRPBX)
are similar, but many have a static mix of investments geared to a
certain age group. It's up to you to decide when to move into more
conservative investments. Meanwhile, old-fashioned balanced funds like
Vanguard Tax-Managed Balanced (VTMFX) simply hold a mix of asset classes
ranging from investment-grade bonds to growth stocks in an effort to
balance risk with reward.
In any case, the latest Dalbar study of investor behavior over the past
two decades confirms what previous studies have shown -- that investing
for the long term is the best way to maximize returns. And since
investors tend to hold asset-allocation funds at least a year or two
longer than ordinary stock or bond funds, these securities can help you
earn maximum returns, even though they aren't necessarily the
highest-yielding funds around.
In response to the aging baby boomer crowd, asset-allocation funds have
become one of the fastest-growing segments of the fund market. Most have
also shown remarkable resilience in the face of recent market
volatility. Given the benefits of stock/bond diversification,
asset-allocation funds outperformed almost all stock-only funds when the
market turned south this past summer, according to Morningstar.
With this in mind, I recently hunted down some of the highest-yielding of these
"all-weather" funds . . .
Important Note: Throughout
the remainder of this article, Editor Carla Pasternak and our research
staff provide the names of 9 specific asset allocation funds
("retirement funds") with dividend yields of up to 8.8%.
However, in order to view the remainder of this article, you'll
need to subscribe to our premium newsletter -- High-Yield
Investing. After you subscribe you'll receive immediate access to
this full article, as well as our monthly High-Yield Investing
newsletter and a host of additional premium content. Please visit one of
the following links to continue .
. .
Good investing!
Carla Pasternak
Editor
High-Yield Investing
http://www.StreetAuthority.com
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Carla
Pasternak draws on a variety of financial backgrounds to make profitable
calls on income-generating stocks for her readers.
Carla has
been employed in the investment industry for more than two decades. In
addition to her work as a writer for several other nationally recognized
financial publishers, her previous experience includes a position as
President of a well-respected investor relations firm. She has also been
writing shareholder reports for public companies (annual reports,
speeches, corporate profiles, slide shows, etc.) since 1980.
A highly
successful investment analyst, Carla specializes in high-yield,
income-paying stocks. In that pursuit, she's always mindful to select
companies that not only pay rich dividends, but that also have the
potential to deliver strong long-term capital gains.
On the
educational front, Carla holds both MBA and Ph.D. degrees. When she's
not watching the market, she's teaching business courses at the college
level and managing several million dollars in portfolio assets.
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