Saving smart - retirement planning and investing - includes related article on investment software and other resources

Home Office Computing, May, 1994 by Linda Stern

HOME OFFICE COMPUTING'S survey statistics indicate that the average age of our readers places them in the heart of the baby-boom generation. If you're like a lot of us, you may have only recently begun to realize that you're not a kid anymore. Surprise! That means, among other things, that sooner, rather than later, you'll want to invest for your future with some sort of retirement plan. But even if you're younger or older than this large generational group, the earlier you start, the better off you'll be as the years go on.

Creating a pension plan, however, is only step one on the road to a comfortable retirement. Whether you choose a Keogh, SEP-IRA, or other account, setting up your plan--complex enrollment forms notwithstanding--is actually the most effortless step. The hard part comes when you look at the tens of thousands of stocks, bonds, mutual funds, and insurance company offerings. As you start to figure out where to place your pension funds profitably, you'll want to combine a high but safe return with low investment costs.

This plethora of choices is not as confusing as it might first appear. Almost all of the investment advice being given now boils down to a simple bedrock strategy that you can follow at home, in your spare time.

These 10 fundamental rules provide a quick, easy, and very solid start down the road to riches.

1. Invest in stocks. It's hard to find a financial professional around today who hasn't steered the bulk of his own retirement fund into the stock market. Over time, the pros agree, stocks offer superior returns over every other kind of investment.

Ibbotson Associates, a Chicago research firm known for its historical measurements of investment returns, has the numbers to prove it. In the 68 years since the firm and its founders started tracking this data, they've found common stocks returned an average of 10.3 percent a year; small-company stocks have returned 12.4 percent; long-term corporate bonds, 5.6 percent; long-term government bonds (considered safer due to their government backing), 5.0 percent; and treasury bills--the safe short investment some of us rely on through bank CDs--have returned 3.7 percent, barely beating the 3.1 percent average inflation rate over the years Ibbotson has been in business.

"There has never been a five-year period in which stocks posted a negative return," notes Carl Gargula, Ibbotson's managing director.

Be aware, however, that as of this past winter, we've been thriving under one of the longest bull markets in history. Some experts are speaking more bearishly, predicting a downturn in the market. That doesn't mean you shouldn't put money in the market, but be even more particular and careful when choosing investments.

2. Invest through mutual funds. You should rarely pick your own stocks, however, unless you have at least $20,000 and the yen to play the market as a time-consuming and challenging hobby. Instead, buy mutual funds that pick stocks (and bonds) for you. Today's financial marketplace offers more than 4,000 mutual funds of every stripe, size, and cost. And there are enough mutual fund guides to please even the most thorough student. (See "Expert Advice," "Resources," and "Leading Mutual Fund Families" for details about these guides, software for investing, and top mutual funds.)

3. Diversify. Modern portfolio theory is based on the Nobel Prize--winning work of economists Harry Markowitz and William Sharpe, who demonstrated that you could minimize risk and maximize return by diversifying among investments that don't correlate to each other. Gordon Williamson, a La Jolla, California, investment adviser and author of The 100 Best Mutual Funds You Can Buy (Bob Adams Inc.), notes that by the time you've amassed $50,000, you may want your portfolio to include the following categories in mutual funds: domestic stocks, foreign stocks, small-company stocks, big-company stocks, foreign bonds, and high-yield bonds. Williamson suggests, for example, that a reasonable mix might be 70 percent stocks and 30 percent bonds, with each group divided almost 50-50 between domestic and international holdings.

4. Consider your own risk comfort level. If you can live with a bumpy ride, you may end up with greater returns, notes Michael Lipper, president of Lipper Analytical Services, the New York mutual fund research firm. The market tends to reward risk, so if you buy the riskier investments within each category--small stocks instead of large-company stocks, corporate bonds instead of government bonds--you'll usually be rewarded over time with higher yields and higher gains. If you're not comfortable seeing share prices drop, even temporarily, opt for less volatile investments, such as mutual funds that invest in only blue-chip, dividend-paying, solidly valued companies or balanced funds that make their own mix of low-volatility stocks and bonds.

5. Watch the fees. If you're going to do your own research, pick no-load mutual funds. The loads, or sales charges, are commissions paid to brokers who recommend funds and have no correlation with return whatsoever. Particularly on the bond side of any portfolio, a sales fee can turn a good bond-fund return into a mediocre one, a mediocre return into a poor one. And know that even no-load funds sometimes have hidden charges: So-called 12(b) 1 fees are annual marketing charges levied by some funds--such as the popular and solid performers Kaufmann Fund ([800] 237-0132) and Berger One Hundred ([800] 333-1001)--which can end up being more costly than an upfront sales charge on such long-term investments as retirement funds.