As we begin 2016, I want to present readers with two seemingly unconnected facts.
First, the U.S. government is not giving a cost of living adjustment to Social Security recipients for the third time since 2010.
Second, the S&P 500 Index closed at 2,052 on November 18, 2014. Since then, the broad market has done nothing and is basically sitting in the same spot.
As disparate as they seem, these facts have one crucial implication: Now, more than ever, we need to invest wisely for retirement.
With that in mind, here are five rules for investing wisely in 2016 and beyond.
Rule #1: Begin investing yesterday.
The earlier you start, the longer your money gets to work for you. Every dollar invested at age 25 is worth anywhere from three to five times more than a dollar invested at age 45.
Remember – you can replace lost capital. But you can never replace lost time.
Rule #2: Don’t chase the hot stocks.
That’s just gambling. The old Wall Street adage is that “trees don’t grow to the sky.” Just ask anyone invested in energy MLPs.
2015 was the year of FANG, which changed to FANA. Red-hot Facebook Inc. (FB), Amazon.com Inc. (AMZN), Netflix Inc. (NFLX) and Google, which changed its name to Alphabet Inc. (GOOG), soared while most stocks drifted.
It’s unlikely they’ll repeat their performance in 2016. Want proof? Just look at what these stocks did in 2014. It’s nothing to write home about.
Rule #3: Do not invest in index funds.
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As Sir John Templeton said, if you own the market you can’t beat the market. And you’re going to want to beat the market.
Historically, when the U.S. stock market is richly valued (as it is now), poor performance follows. I know Wall Street prefers not to talk about it, but there have been periods of 10 years or more where real returns in the overall market have been lousy.
And we’re certainly richly valued.
The Buffett indicator, which compares the value of stocks and gross domestic product, is at its second-highest level ever. Yale Professor Robert Shiller’s cyclically adjusted price-to-earnings ratio (CAPE) shows that the market has only been more expensive twice – in 1929 and 2000.
Active management and stock selection will be key going ahead. So keep reading Wall Street Daily. We always strive to keep investors ahead of the curve.
The richly valued market is one key reason why I continue telling people to avoid robo-advisors. Your money will just be put into a number of index funds, which will be guaranteed to fall if the broad market falls.
Rule #4: Diversify.
As I’ve been fond of saying in these personal finance articles, don’t limit your “shopping” to just one aisle. You wouldn’t do it in the grocery store, so don’t do it when building a portfolio for your future.
I also like to point out to people that there’s always good value somewhere in the global market. For example, emerging market stock valuations on a P/E basis are at an all-time low.
And the price-to-book (P/B) ratio is at a mere 1.28 times, which is where it was in the midst of the 1997-98 Asian financial crisis. For comparison, the current S&P 500 (P/B) ratio is 2.82.
Rule #5: Set a financial plan and be patient.
The goal is to be a winner in the long term. You don’t have to win in the stock market every day.
Along those lines, here’s my favorite Warren Buffett quote: “Someone is sitting in the shade today because someone planted a tree a long time ago.”
Plant your tree today so that you can be sitting in the shade – and enjoying life – during your retirement.