How to return (wisely) to the stock market
How you re-enter the stock market matters, especially if you’ve taken a hiatus. Even if you’re anxious to get back in the game, you’ll want to buy into stocks gradually.
Investing a set amount periodically, a strategy called dollar-cost averaging, helps you psych yourself into sticking to your investment plan. It lowers the average per-share cost of your stock holdings by ensuring that you buy more shares when prices are down and fewer shares when they’re richly priced. You also might want to let a trusted advisor help you figure out how much of which assets to own.
Hybrid funds, which include target-date funds and balanced funds, toggle between stocks, bonds and money markets, within set parameters. Industry giants Fidelity, T. Rowe Price and Vanguard offer target-date funds. We have a slight preference for the Price and Vanguard funds. Price’s funds have the most aggressive mix, and Vanguard’s the most conservative.
A good one-stop balanced fund worth considering is Vanguard Star (symbol VGSTX), a diversified mix of other Vanguard funds that invest in bonds as well as U.S. and foreign stocks. FPA Crescent (FPACX), a member of the Kiplinger 25, owns everything from stocks and bonds to preferred shares, convertible securities and bank loans, a mix that does well in both up and down years.
For super-skittish investors, financial planner George Kiraly, Jr., at LodeStar Advisory Group, in Short Hills, N.J., favors Vanguard Wellesley Income Fund (VWINX). The fund, which holds about one-third of its assets in stocks and the rest in high-quality bonds, lost only 10 percent in 2008 and has returned nearly 8 percent annualized over the past decade.
If wild swings in the market wreak havoc with your financial fortitude, focus on low-volatility investing. By sidestepping big market swings, you won’t just sleep better, you may even beat the market in the long run. That’s because large losses often cost investors more than big gains can make up.
Research coauthored by Brendan Bradley, director of managed volatility strategies at Boston-based Acadian Asset Management, shows that from 1968 through 2012, a portfolio of low-volatility stocks would have returned 11.2 percent annualized, compared with 9.5 percent for the S&P 500.
You’ll find scads of low-volatility stocks among the household names on your shelves (think General Mills, Clorox and Johnson & Johnson). Make sure the stock’s “beta” (a measure of how a stock’s price moves relative to the overall market), is below the market’s beta of 1. You can find this information on investing sites such as Yahoo Finance,
The easiest way to buy low-volatility stocks is with one of a new crop of exchange-traded funds, such as PowerShares S&P 500 Low Volatility Portfolio (SPLV).
Anne Kates Smith is a senior editor at Kiplinger’s Personal Finance magazine. Send your questions and comments to moneypower@kiplinger.com. For more on this and similar money topics, visit www.Kiplinger.com.
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