Investing for the long term

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Investing for the long term
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By Peter Morici – – Monday, February 20, 2017

ANALYSIS/OPINION:

Ordinary investors can’t be blamed for hesitancy about stocks with market indexes trading near record levels and President Trump’s radical, sometimes quixotic ideas creating so much uncertainty. Yet patience and a diversified portfolio remain the best long-term investment strategy.

Saving for retirement and other long-term goals should be seen in the context of several investment decisions households make over a lifetime. It begins with college, hopefully aided by prudent career planning, sound housing choices and an early start to stashing away a modest portion of each paycheck, preferably in a tax-sheltered vehicle.

A good education is like a smartphone. It makes life more enjoyable — that’s why we make reluctant engineering and finance students take classes in the arts and social sciences. And it is a tool to earn a decent living — parents do their children and themselves a favor by focusing them on likely career prospects when choosing majors.

Spending a bundle on a private or out-of-state college often does not pay out — unless the diploma carries the patina of an Ivy League institution or the admissions letter comes with a big scholarship.

Otherwise, young adults end up saddled with debt and living where their parents least want them — in their basement.

Realtors like to tell folks homes are life-cycle decisions — a honeymoon cottage for newlyweds, the four-bedroom edition for raising a family, and a retirement nest to finish life. That advice will saddle you with a lot of transactions costs, and this will fund your realtor’s retirement more generously than your own.

If your job is “reasonably secure” and you won’t be relocating for at least three to five years, then buy a sensible home that can accommodate a family — not lavishly but reasonably — and will be functional enough as you age.

If you have to move unexpectedly, such residences sell well in most markets, whereas specialized properties like two-bedroom condos and empty-nester specials are much harder to offload when the market is in the doldrums. Avoiding distress sales of principal residences is critical to keeping retirement accounts intact and not selling stock from those portfolios when equity markets may also be depressed.

Finally, despite all the uncertainty about stocks, remember that retirement savings are for the long term — and ordinary folks really have only two choices — stocks, or bonds and CDs.

Simply, tax laws regarding depreciation and cash-flow losses on real estate make investing in houses and condos for appreciation unattractive for ordinary investors, and access to hedge funds, private equity funds and similarly leveraged vehicles are generally limited to rich folks who can afford to make big bets with 10 percent of their assets.

Over the last 50 years, the S&P 500 Index, which includes about 80 percent of U.S. publicly traded companies, has outperformed 10-year Treasury securities by about 60 percent.

Currently, that index is trading at a price-to-earnings ratio of about 26 — that indicates a 3.8 percent rate of profit from dividends and earnings retained by management for future investments.

Over the past 25 years, the P/E ratio has averaged about 25, and factoring in expected growth in corporate earnings over the next 12 months, the current P/E ratio falls to about 18.

All that means stocks could surge another 25 to 33 percent over the next two or three years, but life, and especially the stock market, gives no guarantees.

My basic advice remains simple.

Folks nearing retirement should keep about half their money in cash and fixed-income vehicles with maturities of less than three or five years, and invest the rest in a diversified portfolio of stocks. For example, an S&P 500 Index fund offered by USAA or a similar low-cost service.

Putting about 20 percent in foreign stocks can smooth performance, because sometimes the U.S. economy and stocks do better while at other times foreign equities outperform. Consider a vehicle like the Vanguard Total International Stock Index Fund, which tracks non-U.S. stocks around the globe.

If you’re younger, put aside some cash for emergencies and invest a reasonable amount each month in a similar basket of equities, follow that discipline through thick and thin, and you’ll do well.

That’s where my wife and I have put our money and though professors don’t often get rich, we are well positioned to be retired and travel.

• Peter Morici is an economist and business professor at the University of Maryland, and a national columnist.

Copyright © 2017 The Washington Times, LLC. Click here for reprint permission.

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