The Soaring Stock Market And Your Nest Egg

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The stock market's been charging higher lately. After the Dow Jones industrial average topped 20,000 for the first time in history in January, it kept surging to close above 21,000 earlier this week. So what's going on with the stock market and what does it mean for your retirement account?

Rasheed Irani works for a helicopter manufacturer in Torrance, Calif., and like many everyday Americans, he's been paying more attention to the stock market lately.

"I was speaking with my wife and we were both obviously happy that the market is going up, and she said, 'I'm so glad our 401(k) is doing much better now that Trump is the president,' " he says. Irani says he disagreed that it was because of the newly elected president. "I think I was able to convince her that it is not."

Actually, many investors do seem to be enthusiastic about Trump's pledges to cut taxes and regulations, and build infrastructure. But beyond the debate over why the market is up, other people are wondering what to do. Do they own enough stocks, or too many stocks, and what happens next with the market?

To get some answers we called up Burt Malkiel, an economist and author of A Random Walk Down Wall Street, a classic book on investing. He's also head of investments for the roboadviser Wealthfront. Malkiel says people right now have a lot of questions about the market, "and what I tell people is nobody — and I mean nobody — is able to tell you whether the market is too high or too low."

That may not sound very helpful. But Malkiel says you don't need to know where the market is headed next or why. There are other things that are very important for a successful investor to know. "Let me tell you the one thing that I am absolutely 100 percent sure of, and that is the lower the fee I pay to the purveyor of an investment service, the more there is going to be for me," Malkiel says.

Pay the lowest fees possible. Malkiel says that's crucial. He says you also want to have the right mix of U.S. stocks, bonds, emerging market stocks, real estate funds, and more. Roboadvisers can set that up for you for a small fraction of 1 percent of your assets. (Wealthfront, for example, charges 0.25 percent.)

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But Malkiel says you do not want to play the game of paying brokers or mutual fund managers a lot more than that to try to pick a bunch of stocks that will be winners. "This was something Warren Buffett stressed in his annual letter to shareholders," Malkiel says.

Buffett's letter came out just this past weekend. Buffet wrote about a $1 million bet he made with a hedge fund manager 9 years ago. Buffett bet that a simple low-fee index fund that just blindly owns 500 major U.S. companies (the S&P 500 index) over a decade would beat any group of hedge funds that the person betting against him would choose.

The hedge fund manager who took the bet is losing — and losing big time. Buffett writes, "$1 million invested in those funds would have gained $220,000. The index fund would meanwhile have gained $854,000."

The S&P 500 index fund Buffett used has gained nearly four times as much value as the group of hedge funds — in part because of the hedge funds' big fees. "The fees border on the obscene," Malkiel says.

So there are good ways to invest online at a very low cost.

But some people still want a human being they can talk to for investing and other financial planning advice. And that can get risky. "Just because a person calls himself or herself a financial adviser, they may be nothing more than a salesperson," says Kevin Keller, CEO of the CFP Board, which represents certified financial planners across the country.

Keller says many advisers get commissions to steer you into bad investments with big fees. And, he says, "that's why it's so important to select an adviser that's going to work in your best interest."

The Obama administration put in place a rule that would require advisers to act in people's best interest. But, the Trump administration has moved to delay it and might kill it.

Some financial industry groups argue the rule is too burdensome and hard to implement and that it limits consumer choice. But Keller, who is also in the industry, doesn't buy those arguments. Speaking for himself and the Certified Financial Planner Board, he says, "we support the rule because we think it's the right thing to do."

But with the rule up in the air, Keller says the next best thing is to ask your financial adviser if he or she is acting in your best interest, as a fiduciary, at all times. The "at all times" part is important, he says. Keller says to get that in writing. And his CFP board has a list of other important questions to ask your financial adviser to make sure you're getting good advice.