Those bullish calls may seem off-key to many investors who are still hurting from the market’s collapse. But that truism of investing–buy low, sell high–still holds, and many experts say now’s a good time to buy low. Here’s how to build a portfolio that should survive and thrive in the years ahead.
A little of this, a little of that. Here’s a simple plan from Ross Levin, a money manager in Edina, Minn., for diversifying: split your money into four equal investments in mutual funds that buy big-company stocks, small-company stocks, international stocks and bonds. Once a year, sell enough of the winners and buy enough of the losers to get back to the original split. This rebalancing formula would have forced you to sell some high-flying stocks in 2000 and buy bonds, back when there was money to be made with them. Now it would tell you to sell some bond-fund shares and buy stocks.
Be stingy. In a sluggish market, fees and taxes matter more than ever. Harold Evensky, a Coral Gables, Fla., adviser, is a big fan of market-matching index funds with low fees that trade infrequently enough to minimize annual taxes. His favorite is a fund that trades like a stock: iShares Russell 3000 Index Fund (IWV). It keeps management expenses to a low 0.2 percent a year. What does that buy you? Invest $20,000 today and, if stocks average 8 percent a year, you’ll end up with $5,300 more after 10 years than you would get in a typical stock fund charging 1.5 percent.
Dividends really pay. In the first three quarters of this year, dividend-paying stocks in the Standard & Poor’s 500 Index outperformed the rest by close to 40 percentage points. Look for companies with dividend yields higher than 2.6 percent, but that don’t pay out more than 65 percent of their earnings in dividends, says Charles Carlson, editor of Drip Investor, a newsletter that focuses on such stocks. His picks: Bank of America (BAC), Chevron Texaco (CVX), Emerson Electric (EMR) and General Electric (GE).
Steal some deals. One famous hunter of underappreciated stocks, David Dreman, looks for stocks with price/equity ratios below the S&P’s current 20 and earnings growth that beats the S&P’s 8 percent for the last year. So he’s buying Freddie Mac (FRE), Fannie Mae (FNM) and Bristol-Myers Squibb (BMY). Nygren’s been scooping up Home Depot (HD), which used to be a growth favorite but has fallen so far that it now looks like a good buy to him. Philip Morris (MO) is also showing up on buyers’ lists.
All this should help with the “buy low’’ part of the equation. And with a little help from the market, you should be able to sell high.
