Being an investor is tricky these days.
Hardly anyone is predicting market Armageddon, but this is not the "get rich quick" era. The word on Wall Street is: Prepare for lousy stock and bond returns for years. That doesn't mean you'll lose money, but don't expect to rake in the usual 7% to 8% return on stocks and 3.6% on bonds, according to investment firm Bernstein. Even private equity returns aren't what they used to be.
So what do you do? This is the key debate today on Wall Street. It was the headline of the Jill on Money podcast Friday.
You have three main options in this environment. What you do comes down to how much risk you want to take.
"Any basic building block of a portfolio is going to give you lower returns" in the next fives years, says Seth Masters, chief investment officer at Bernstein. "To get high returns going forward, you have to take your risk level up."
1. Stay put. Boring is good. It doesn't sound sexy, but for a lot of people the best path forward in this era of lowly returns is to stay invested and make sure you're diversified.
"This is a time to keep your portfolio boring, not exciting," argues Kate Warne, chief investment strategist at Edward Jones.
Warne's best advice is to rebalance soon. If you're the type of person who hasn't looked at your portfolio in years, it's probably time to call your financial adviser or 401k provider (or login online) and make sure you actually have the right diversification.
Many younger investors have a portfolio that is roughly 80% stocks and 20% bonds. Investors in the middle or end of their careers are probably closer to 60% stocks and 40% bonds. The problem is the stock market had a huge run up from 2009 to 2014. That means a lot of people are holding way more in stocks than they realize. Don't be caught off guard. Rebalance if you need to.
2. Think international. If you are comfortable with taking a bit more risk, look overseas. Yes, there are lot of crises in the world, but there's also more opportunity to make money. Stocks in Europe and emerging markets look cheap, especially compared to U.S. stocks. There's more upside potential.
Bob Baur, chief economist at Principal Global Investors, lays out the case for emerging markets: "So a stable dollar, the rebound in commodity prices, an expanding U.S. trade deficit, and an inactive Fed, all support growth in emerging economies. Stocks in Europe and Japan may continue to struggle, so we'd overweight U.S. and emerging market stocks in an equity portfolio."
Warne favors Europe and developed market international funds. Despite the headwinds from Brexit, she notes that it could end up spurring Europe to finally make some necessary reforms that are better for business or even doing stimulus.
3. Reduce your fees. Companies use this tactic all the time. When they aren't growing, they focus on cutting costs. That keeps their "bottom line" about the same. Investors can play a similar game by being rigorous about reducing fees.
There's been an explosion of low cost mutual funds and index funds. It's pushed almost all providers to lower their costs. Fidelity recently announced cheaper fees for 27 of its funds. Then there's Robinhood, an app that offers no fee trading, a big savings from the $9.99 many brokers charge to buy and sell stocks.
Saving money on fees can really add up. If you're not even sure what fees you are paying, a new website called FeeX will calculate it for you and make recommendations on how to reduce your fees.
"Typically, people tend to reduce their fees by about 85%," says Yoav Zurel, co-founder and CEO of FeeX.
The bottom line is "you need to be more diversified, not less in a world of uncertainty," says Bernstein investment strategist Masters. "Give yourself more ways to win."