Four Tips To Invest In A Low-Return Environment

With the stock market officially in bear market territory and even more gloom on the horizon, the next decade isn’t shaping up to be too hot for stock returns.  To make matters worse, sustained periods of excessively-low interest rates and easy lending criteria seems to have stimulated inflation, further eroding the purchasing power of even positive returns.  Realistically, I think we can expect real after-inflation returns of 2-3% over the next decade, or less than half the market’s long-term average.  You can’t get blood from a stone, but there are some things you can do to squeeze the most return out of your portfolio in a low-return environment.

• Minimize Fees – When the market generously hands investors double-digit returns year after year like it did in the late 90’s, paying outrageous fees for expensive active management doesn’t seem all that foolish.  When returns are in the 7-8% range, however, suddenly that 1% management fee makes a difference.  Minimizing fees by investing in broadly-diversified index funds and ETFs is the best way to make sure you get the most of what the market deems fit to dole out.
• Minimize Taxes – There’s nothing worse than receiving a large capital-gains distribution and paying a heavy tax burden as your portfolio merely trudges along.  In some cases, it’s even possible to OWE taxes on capital gains in a year when your funds actually lose money.  Index funds minimize taxes, which means they maximize your return.
• Stick To Short-Term Bonds – In times of slow growth, the Federal Reserve tends to keep interest rates low in order to stimulate growth.  For bond investors, this means interest rates really have nowhere to go but up, which puts downward pressure on bond prices.  Keep your bond durations short to avoid a capital loss when the inevitable happens and interest rates rise.
• Invest Abroad – Don’t put all your eggs in one basket, because there’s always a bull market somewhere.  Slow growth in the US means faster growth elsewhere as somebody else takes US market share.  Investing in broadly-diversified foreign index funds guarantees you a piece of the pie, and hedges your dollar exposure to boot.  If the dollar falls, you’re golden.  If not, you’ll still benefit from economic growth around the world, which will offset the pain somewhat.