Thursday, September 2, 2010

SIMPLE 401K investing. Spend 5 minutes and potentially improve your wealth.

Most people get little advice an how to invest in their 401K plan. This is a SIMPLE approach. Spend 5 minutes reading the link below - simple investing advice on how you could invest in your 401K.

Remember that the more you allocate to stocks in your portfolio the greater the downs you will experience.

http://online.wsj.com/article/SB10001424052748704407804575425851977494576.html?mod=ITP_thejournalreport_0

Combine the above with this golden nugget of wisdom from John Bogle, summarizing a recent Morningstar study in the August 26, 2010 Wall Street Journal:

"A mutual fund's past returns are no guarantee of its future. Even the most sophisticated rating systems are erratic at best in forecasting a fund's performance in the years ahead. But for decades, academic experts and analysts have proven that fund costs are a powerful predictor of relative performance. Returns come and go, as it were, but costs go on forever.

A recent study by the Morningstar fund evaluation service came to this very same conclusion. In an admirable report that was the opposite of self-serving, Morningstar found that using fund-expenses ratios as a factor in choosing mutual funds was even more helpful than relying on its own carefully constructed "star ratings." Specifically, focusing on funds with the lowest expense ratio was more helpful in fully 58% of the time periods studied.

"In every asset class (U.S. stock funds, international stock funds, balanced funds, taxable bonds, and municipal bonds) over every time period," Morningstar wrote, "the cheapest quintile produced higher net returns than the most expensive quintile." Among domestic equity funds, the returns of the lower-cost funds outpaced the returns of the higher-cost funds by about 1.3 percentage points annually. That proves to be a compelling edge. Over a 50-year investment lifetime, for example, a return at the 8.1% historical average for stocks would produce nearly 50% more capital than a return of 6.8%.

These calculations actually understate the success of low-cost funds. "Survivor bias"—only the more successful funds survive to make it into the database—permeates the equity-fund data. According to Morningstar, in the highest-cost quintile only 57% of equity funds survived over the past five years. Even in the lowest-cost quintile, only 81% survived. So much for relying on most mutual funds as long-term investments.

The idea that costs matter is not new. In a 1966 article in the Journal of Management, economist William F. Sharpe concluded, "all other things being equal, the smaller a fund's expense ratio, the better results obtained by its stock holders."