By John Wasik
CHICAGO, Jan 7 (Reuters) - Using the non-courageous power of hindsight, it’s easy to look back on the previous year and see where the “smart” and “dumb” money flowed.
The direction of money last year tells a well-worn tale: When fear dominates, money moves into safer vehicles such as bonds and money-market funds.
After 2008, you can hardly blame anyone for still wanting to avoid volatility. But those who retreated mostly to fixed-income have missed the better part of a bull market that’s been running since 2009.
Although the S&P 500 index ended up about 13 percent in 2012, most investor funds flowed away from stocks during 2012. Investors redeemed money from stock funds for the 19th straight month through November, 2012, according to Lipper Research, a division of Thomson-Reuters. Nearly $4 billion was pulled out of U.S. stock funds in the week ending January 2.
Bond and money-market funds were more like mirages and less like oases last year. In November, for example, some $95 billion was added to fixed-income, while $14 billion was redeemed from stock and mixed-equity funds. The NASDAQ Index climbed more than 1 percent in November, its best showing for that month in three years.
I know Washington will throw investors into a lot of pot-holes on the way to negotiating debt ceiling and budget issues. But it’s still a good time to buy stocks.
The employment recovery is still on track, with more than 150,000 jobs added last month, the Labor Department reported on Friday. Gains are also being posted in personal income, housing and corporate earnings. If you can ignore the relentless noise from Capitol Hill, it’ll be possible to make some more intelligent money decisions.
Here are three ways to ensure that you’re making smart money moves this year:
1) Invest broadly on a regular basis. One way to avoid the herd mentality is to stay focused and buy fixed-dollar amounts monthly in all investment styles and company sizes -- if you can afford to take the risk. You can invest in a broad range of stocks through funds like the Fidelity Spartan Total Market Index fund (FSTMX) or the Vanguard 500 Index fund (VFINX).
2) Invest cheaply. If you’re going to buy individual stocks, make sure that they have dividend reinvestment plans, which allow you to buy new shares and reinvest dividends without paying brokerage fees.
Since the beginning of 2009 through the end of 2012, the S&P 500 index has returned more than 77 percent, if you include reinvested dividends. That’s about a 16 percent annualized return. Even if you adjust for inflation, it’s still a 13 percent annualized gain.
By contrast, the Vanguard Total Bond Market ETF (BND), a proxy for U.S. bonds, returned about 5.6 percent over the past five years through the end of 2012.
3) Invest passively. If there was any measurable smart-money movement in 2012, it was into exchange-traded funds, which gained net inflows for 12 straight months. The lion’s share of this money went into low-cost index ETFs, which track specific markets and sectors rather than relying upon money managers to pick securities. All told, more than $150 billion was shifted into ETFs during the year, the biggest surge since 2008.
A key reason ETFs are gaining assets is that they charge rock-bottom annual fees and hold passive portfolios of large baskets of securities. There are no timing errors, almost no turnover costs and you get near-index returns.
If you’re investing in stocks -- or any other securities for that matter -- choose ETFs that charge 0.10 percent annually or less.
Actively managed funds are yesterday’s game and you’re not likely to get last year’s performance. Most of these funds don’t beat indexes over time. If they do, it’s mostly due to luck.