Investing Habit #1:
Remain in the Market
Wouldn’t it be great if you could get out of the stock market right before a major downdraft and get back in just as the market was recovering? In deed it would be. The problem is, no one can foretell market turns. Worse news for market-timers, returns have tended to come in quick bursts.
Investing Habit #2:
Different investment assets serve different needs. Stocks, for example, tend to grow in value nicely over time, but at the cost of short-term volatility. Bonds are much more stable, and they produce regular income, but they’re typically slow-growers. Cash investments usually grow even less, and should be seen as a short-run safety play. But too much of that “safety” will make long-term security impossible.
As important, the behavior of any asset class is unpredictable over short time periods. That’s why it’s a good idea to not put your eggs into one basket—including U.S. assets—but rather hold onto a globally diversified mix. When one asset class is performing poorly, another will do better, providing some insulation against risk.
For just one example, consider emerging-markets stocks (admittedly a particularly volatile asset class). They were at the top of the chart in 2009 (with a 78% return!) and 2010, only to become the worst performer in 2011, posting an 18% loss. Any asset will likely give you good and bad years; the key is to invest in many, in proportions suited to your return and risk goals.
Here’s where the different generations tend to have different priorities. Millennials can feel relatively secure with a portfolio heavily weighted toward stocks, since they can expect very long time horizons—though some may wish to stick their toes into the investment waters with a conservative mix. Many Gen Xers will likely also own stock-tilted portfolios, but probably with more bonds in the balance. Boomers need to be careful, in our view: They may migrate toward bond or even cash portfolios because of stock risk, but with life expectancies for 65-year-olds now well in the 80s, most Boomers shouldn’t abandon stocks: They need investment growth as well as safety and income
Investing Habit #3:
Ask About and Track After-Tax Returns
The tax bite on your investments can be painful—perhaps in the range of 35% or more for investors in high tax brackets living in high-tax states and cities. You can help mitigate the pain by adopting the habit of being aware of taxes whenever you invest—certainly in taxable accounts but in retirement accounts as well when you consider which assets you should shelter from taxes. When you’re thinking about buying into an investment, ask whether after-tax results are available and what the annual turnover is, since high rates of buying and selling securities mean higher capital-gains taxes.
For Millennials starting out as investors, taxes are often a less-important consideration (unless they’re also independently wealthy). As an investor’s age increases, all else equal, taxes become more significant. Boomers may think not so at first, since their tax brackets tend to go down after leaving work. But taxes take center stage no later than age 72, when Required Minimum Distributions (RMDs) from most retirement accounts become mandatory (raised from age 70½, courtesy of a late-2019 legislative overhaul). RMDs can be a big deal; investors should consult with their tax professionals.
When it comes to investing, stay in the market, stay diversified, and be aware of taxes.