Passive funds aim to match market averages. Because the composition of index funds, such as those that track the S&P 500, is already defined, they are cheap to manage and have lower fees. In picking a passively managed fund, investors can choose between two types of funds: an index mutual fund and an exchange traded fund, or ETF.
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"Typically, ETFs are baskets of a portfolio that trade on a stock exchange just like a security," says Kevin Simpson, chief investment officer of Capital Wealth Planning in Naples, Fla. The major difference between an ETF and a mutual fund is that ETFs can be bought or sold at any time during the trading day, while mutual funds can only be bought or sold once a day after the close of trading.
ETFs tend to have lower expenses than even passively managed index mutual funds, but the difference may not be great. Because they trade on exchanges, ETFs may incur a trading commission each time they're bought and sold. Some brokerages provide free ETF trades, but many don't. Commissions can add up, especially when investors are making regular fund purchases.
Beyond the investment vehicle you use, maintaining an appropriate mix of stocks and bonds is crucial. Bonds have long been advised for older investors seeking safe sources of retirement income. But this rule is harder to follow today. Interest rates have been low for several years and are near and even below zero for the safest U.S. government bonds. Furthermore, the Federal Reserve has said it intends to keep rates unusually low at least through the end of 2014.
[See Why Mutual Funds Make Sense in a Volatile Market.]
"Normally, I and other advisers would have suggested a heavy allocation of bonds" for older investors, Malkiel says. "I would urge them to think about fine-tuning" that allocation. "For some, high-dividend stocks might be substituted for bonds," he says.
For the same reason, Moshe Milevsky, a finance professor and annuities expert at York University in Toronto, can no longer trumpet his fondness for U.S. Treasury Inflation Protected Securities (TIPS) and some other traditional inflation hedges. The yields are just too unappealing.
The same goes for the types of safe annuities favored by Milevsky. He normally recommends what are called "income annuities," or immediate annuities. An investor approaching retirement can convert some of her retirement nest egg into a stream of guaranteed income payments for the rest of her life.
[See Why You Should Give ETFs a Try.]
"These annuities are basically pensions," he says. "I think those are great instruments. Everybody should have a pension." But perhaps not now. "The payouts on immediate annuities are so unbelievably low right now that I'm hesitant to advise people to go out and buy what is a great product today." Milevsky says he would like inflation-adjusted interest rates to go from negative territory today to 2.5 to 3 percent before he would strongly recommend income annuities.
Beyond these standard investments, Malkiel has some passionate advice that's particularly aimed at younger investors: The much-maligned American home may once again be a smart investment.
"For young people, homeownership is more attractive today than at any time in decades. Home prices are down, mortgage rates are at all-time lows, and there are tax advantages to homeownership," he says. "I think today, with prices being down as far as they are now, that it will be a wonderful inflation hedge."
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tonywilliams525 of CA 10:41AM May 14, 2012