By Sam Mamudi, MarketWatch, Aug. 2, 2010
NEW YORK (MarketWatch) -- Investors saving for retirement can find mutual funds that invest in almost any kind of asset, but they can't buy the one thing that will have the biggest impact on their nest egg: luck.
Forget about who's the hottest fund manager, which is the best-performing fund or which sector appears to be the best bet. The biggest factor in long-term returns is how the financial markets happen to perform during the 30 or so years an investor puts money away for retirement.
Recent history has provided a fresh lesson in the power of chance, as many on the cusp of retirement were battered by a stock market that dropped almost 40% in a single year amid the crisis in the financial industry. But the crippling effect of a market swoon just before you leave the work force is only part of the story.
The bigger issue is that if your career coincides with a relatively flat period for the markets, there's going to be a natural limit on how much you can hope to reap from your investments.
It's a sobering thought. If so much of your fate as an investor is out of your hands, what can do you do?
Focus on the things you can influence, said Fran Kinniry, head of Vanguard Group's investment strategy group. That means going back to some of the traditional advice about investing for retirement: Start saving as early as possible, save as much as possible, diversify and pick low-cost investment options. It also means you shouldn't rely on projected returns based on historical averages to make up for inadequate savings. And you shouldn't think that your skill or your fund managers' skill in choosing investments is going to save the day.
Still, mutual funds are the best way for most investors to build their savings--many fund firms offer relatively inexpensive investment options that can help investors compile substantial nest eggs.
The goal, then, is to invest with the understanding that while the growth potential of your nest egg may be out of your control, there are steps you can take to come as close as possible to realizing whatever that potential is.
"You need to work really hard on the controllable factors," said Vanguard's Kinniry, starting with an aggressive savings plan. "Ask yourself what the risks are of oversaving, and compare that to the risks of and consequences of undersaving, which are huge," he said.
The rule of thumb in the retirement industry is that individuals should try to save at least 12% to 15% of their gross salary. And the sooner you start saving, the sooner compounding interest starts building up your portfolio.
You can also temper any bad luck that comes your way by diversifying your investments. Stocks and bonds sometimes perform well at different times, while a general rule of thumb is that commodities perform inversely to stocks. Other options include Treasury inflation-protected securities, which may shine in periods when rising consumer prices weigh heavily on stocks and conventional bonds. If you're properly diversified, bad luck in one area of the market may be offset by better luck somewhere else.
http://www.marketwatch.com/story/the-one-missing-investing-ingredient-luck-2010-08-02?siteid=nwhpf
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