By Paul A. Merriman
Early in a new year is a terrific time to take some additional control of your investments, and the payoff could be worth an extra $1 million or more when you’re ready to retire.
In this article I’ll show you three ways to do that, along with the potential payoff for each one.
So you don’t have to peek ahead, here are my three suggestions:
Invest more heavily in equities, as long as you can take the heat of market fluctuations.
Diversify 75% of your portfolio away from the S&P 500 index /zigman2/quotes/210599714/realtime SPX +2.02% .
Reduce or eliminate Wall Street’s recurring fees.
This article is about the accumulation phase of investing during which you are saving (you ARE saving, right?) for retirement.
To do the numbers, I’ll assume you are putting away $6,000 a year into a Roth IRA, and you have a 40-year accumulation period.
With each of these three variables, the longer your time frame, the greater effect you’re likely to get. Over 10 years, the difference will be there, but it might not bowl you over. (That’s just how compounding works.) However, over 40 years, the differences are huge.
The following calculations are based on market returns from 1970 through 2009, a period that included plenty of ups and downs and surprises, both favorable and unfavorable.
In every case, we’re assuming 40 years of $6,000 investments — a total of $240,000 that you make.
Let’s compare investing 100% in equities vs. a more conservative mix: 60% equities, 40% bonds. For this comparison, “equities” will mean the popular S&P 500 index.
In the 60/40 mix, your $240,000 grew to be worth $2.69 million. You had to withstand eight years of stock-market losses. But in four of those years, your annual addition of $6,000 kept your portfolio value from going down year-over-year.
Still, the market’s major losses in 2001, 2002, and 2008 took a significant toll.
If your portfolio was 100% equities instead, at the end of 2009 you had $3.18 million — an additional $420,201. The difference was more than all the money you invested over the years.
However, that extra return came at a cost. In seven calendar years (instead of only four), your portfolio value declined from one year to the next. And even though you might have stayed the course, you could never have known that you would eventually come out ahead.