I just took a look at my 401(k) portfolio returns for last year. I didn't beat the market, but then, I never do, and that's fine by me. Tax time provides a great opportunity to see where you stand.
So why should I be sanguine about being an underachiever? First of all, half of my portfolio is in income vehicles like bonds, so there's no way I'll ever beat the market at large. I'm cool with that.
Then there's my prohibition against active management and buying individual stocks. Well, almost. I make a bet with less than 1% of my portfolio. The rest is in passive index funds.
What's good advice for last year is even better for this year. There will still be plenty of volatility -- despite the recent rally -- so don't be bamboozled into thinking you can dart in an out of the market to avoid trouble. You'll just lose money. Here are three rules to keep in mind:
-- Bet Across the Board and Keep Your Money on the Table. As noted above, you'll lose money nearly every time you decide the market is too pricey or too volatile. You'll lose money because you'll guess wrong on when to leave and get back in.
So just stay put in an allocation that makes you feel comfortable. For me, since I'm within 10 years of my retirement age, half stocks and half bonds is fine. A good rule is your age should match your bond holdings.
If you're 25, then a quarter of your portfolio should be in bonds. If you're 60, then 40% should be in stocks. It's not a perfect guideline, but it protects you a little more from stock market risk over time.
-- Stay Passive, Invest in Index Funds. Most managers and investors who trade actively fail to beat basic market benchmarks. This is a consistent fact.
In 2016, the success of passive investing was proven once again. According to S&P Dow Jones Indices, their "Persistence Scorecard" showed that only 2% of large-company funds beat the market average over the past 12 months. No long-term government fund beat the benchmark.
So pick an index fund for everything you want to own: Global stocks, bonds and real estate. Spread out your money based on your age and risk tolerance. Then only review it once a year. Unless you feel real uncomfortable with your returns, don't do a thing.
-- Have a Solid Plan and Stick To It. Sure, there's going to be lots of distractions. You'll see the top performers from last year and want to invest in them this year. But pay no attention to the man behind the curtain. Most stellar performers can't repeat their best years.
"Less than 1% of large-cap funds and no mid-cap or small-cap funds managed to remain in the top quartile over five consecutive 12-month periods," the S&P study found, "painting a negative picture regarding the lack of long-term persistence in stock mutual fund returns."
What's more important than chasing returns? 1) Saving as much as you can, 2) Lowering investment expenses so that you can save even more, and 3) Knowing how much to save for a comfortable retirement.
If you can focus on those three items this year, you'll be ahead of most people. But that involves ignoring headlines, market sell-offs and broker recommendations. There's a real power in having a plan and staying on course.