Your financial goals are within reach. Here are tips and tools to make sure you achieve them.
Invest against the grain
Bet on the tortoise, Part 1
Fast economies don’t deliver the biggest gains, says London Business School’s Elroy Dimson. Actually, equities in the slowest-growing nations have done the best since 1900, partly because these shares tend to be cheap.
Europe, the biggest tortoise for the next two years, typically trades at a premium to the S&P 500; today its P/E is 10% lower. For a value-minded approach, go with T. Rowe Price European Stock .
Bet on the tortoise, Part 2
Related research by Dimson shows that slow can be better in the emerging markets as well. From 1976 to 2013, equities in the most sluggish countries in the developing world beat stocks based in rapidly growing economies, again partly owing to being undervalued.
With a big stake in mature places like Mexico and South Africa, American Century Emerging Markets Value sports an average P/E of around 8, vs. 10 for the developing world.
Tilt small for big benefits
By boosting your stake in undervalued small-company shares — which have historically outperformed — you can take less risk elsewhere.
Portfolio no. 1: 70/30 strategy
Blue chip stocks: 70%
10-year annual total return: 6.5%
Worst 3-month loss: -21.5%
Portfolio no. 2: 60/40 strategy
Blue chips: 40%
Small-company stocks: 20%
10-year annual total return: 6.8%
Worst 3-month loss: – 19.4%
Notes: Vanguard 500 was used for blue chips. Vanguard Small Value ETF was used for small-caps, and Vanguard Total Bond Market Index was used for bonds. Source: Morningstar
Make sure you have this hedge
One reason to own foreign stocks is that currency fluctuations can boost returns and add to diversification. But with international bonds, the ups and downs of the dollar add risk you don’t want from your fixed-income stake.
So look for a foreign bond fund that uses hedging contracts to cancel currency moves. Vanguard Total International Bond is one that does.
Forget “buy on the dips”
It makes intuitive sense to move against the crowd. Just because equities are cheaper than they were last week, though, doesn’t mean they are a bargain. Some stocks deserve to see their prices fall. If you do want to make an opportunistic buy, however, do it when prices are cheap relative to a measure of value such as earnings