In this episode of Motley Fool Answers, Alison Southwick chats with Motley Fool personal finance expert Robert Brokamp and Amanda Kish, CFA, CFP, and Champion Funds advisor, about five dos every investor must follow to maximize their portfolio. Bro talks about ageism in hiring, how women are disproportionately affected by it,  and other factors affecting their incomes. Also, discover what's in store for next week's episode.

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This video was recorded on August 18, 2020.

Alison Southwick: This is Motley Fool Answers. I'm Alison Southwick, and I'm joined, as always, by ugh! [laughs]

Robert Brokamp: [laughs] That's what my wife says to me every morning.

Southwick: [laughs] Personal finance expert here at The Motley Fool. Hey, Bro, how are you doing?

Brokamp: Hi, Alison. So great to be here.

Southwick: So this week's episode, we're going to give you five dos for successful investing, because last week, we gave you seven don'ts. We didn't want to leave you hanging. So that's what we're going to talk about today. All that and more on this week's episode of Motley Fool Answers.

So, Bro, what's up?

Brokamp: Well, Alison, you know retirement planning isn't easy for anyone, but it's particularly challenging for women. They generally earn less, more likely to spend time out of the workforce caring for family members, and live longer, which is a good thing in general, but it means retirement savings have to last longer.

A recent report from the Brookings Institution quantified some of these challenges. First off, they cite a study which found that women with one child earns 28% less on average over her career than a woman without a child. In contrast, becoming a father typically does not reduce a man's earnings.

Women are also more likely than men to care for their aging parents, a responsibility that predominantly falls on women over the age of 50. So people who leave the labor force early to care for a parent or other elderly relatives lose on average $142,000 in wages. So obviously, people who earn less can't save as much. So that's one reason why they might be behind in retirement savings.

But the report also quantified the impact on Social Security benefits, which is the No. 1 source of income for most retirees. Here's what the report concluded. Women receive Social Security benefits that are, on average, 80% of those that men receive. And having a first child reduces a woman's Social Security benefits through reduced earnings by an average of 16%, and each additional kid increases the gap by 2%. And then, women who leave work to care for an elderly family member not only lose wages, but they also lose an average of $131,000 in lifetime Social Security benefits.

So there are a lot of solutions to all these issues, but a couple immediately came to mind for me. So first of all, if an elderly family member needs help, it should be a group effort and not just fall on one person, who tends to be a daughter or a granddaughter or a niece. And the other thing is, despite living longer, women actually tend to retire sooner and claim Social Security benefits earlier, which means you reduce your benefit. So for those women whose future retirements may be looking a little precarious, one solution is to work longer. But that is easier said than done, which brings me to my next item.

So for Fool Live, which is this program that runs from 9:00 to 5:00 Eastern Time for members of Fool services, I interviewed Elizabeth White, who is the author of a book entitled 55, Underemployed, and Faking Normal. So she had an excellent education: undergraduate degree from Oberlin, Masters from Johns Hopkins, MBA from Harvard, worked for the World Bank. At some point, she decided to leave the World Bank to start her own business. Unfortunately, the business failed. Took most, but not all of her life savings with it, but she thought, "Well, you know, given my experience, given my education it should be easy for me to get back into the workforce." But unfortunately that was not the case. One possible reason was ageism.

Age discrimination begins as early as 35, according to economist Joanna Lahey, and then gets worse from there, particularly for women. One of her studies found that a younger worker is more than 40% more likely to be offered an interview than an older worker.

And then to bring the current virus crisis into this whole picture of how it's more difficult for women, here's a bit from a recent article in The Guardian. "For the first time in history, the U.S. is in a "shecession --" So not a recession, a shecession, "...an economic downturn where job and income losses are affecting women more than men." So during the Great Recession, men lost twice as many jobs as women, but it's different this time around. From February to May, 11.5 million women lost their jobs compared to 9 million men. By the end of April, women's job losses had erased a decade of employment gains.

So that's a whole bunch of bad news, it'll take a whole episode to propose solutions to how to handle all these and factor them into your financial plan.

Southwick: Oh, are you promising that right now?

Brokamp: I'm promising that right now, because I have got to content and I've got the experts, so we're going to cover that in a future episode. But for now, I'll mention some advice from an article by Tanja Hester that appeared in MarketWatch last year. So Tanja is a prominent figure in the FIRE movement. FIRE meaning financial independence/retire early. And these people tend to live pretty simply and they save, like, 30%, 50% or more of their income.

And what Tanja wrote is that due to potential job loss or income disruption later in life, most people actually should be doing what the FIRE folks do: control expenses and save like mad. Because, as she wrote, "Early retirement must become something we all anticipate, not something we treat as a fringe phenomenon for entitled millennial tech bros." And she wasn't talking about me.

And that, Alison, is what's up.

[...]

Welcome back, Amanda!

Southwick: Hello! Welcome, Amanda.

Amanda Kish: Thank you very much. I'm glad to be back. And I guess it's only fair that since we spent all that time telling you what not to do, that today we're giving equal time to all the things that we feel you should be doing.

Southwick: Oh, my goodness! Yeah, all the poor listeners last week were like, OK, OK, but what do I do now? And they must have just been paralyzed, with no idea where to turn left or right or what. Awful.

Kish: Be paralyzed no longer.

Southwick: Yeah, here you go: five dos.

Brokamp: That's right. Here we go, five dos. No. 1: Buy 15 or more Motley Fool recommendations.

Kish: Yeah. So this is really a matter of diversification. So stocks are really great tools to build long-term wealth, but you can't really bank on getting lucky in that the five or six names that you own will be the five or six that beat the market by the widest margin. You know, again, obviously we're Fools, so we believe in picking stocks that can outperform the market, but you still have to branch out and own a number of good stocks to really get all of the benefits of diversifying. So the goal here is to reduce the company-specific risk, so if one name blows up or simply doesn't meet your expectations, your portfolio is not too adversely affected.

And that doesn't mean you have to own, you know, 80 or 100 stocks to be well diversified. There've been studies that show even just owning 20 or 30 stocks, you tend to get the vast majority of the benefits of diversification. So if you're one of those investors that only owns a couple of stocks right now, probably one of the easiest and most effective ways you can help improve your portfolio today and increase your odds of success over the long run is just by buying a few more Foolish stock picks to help get you up closer to that ideal territory.

Brokamp: Yeah, and of course, the number is one thing; the industries and sectors is another. If all your stocks are in the same industry or sector, that can be problematic. Industry is a little more specific; sector is broader. There are 11 sectors. And I think it's always interesting when you look at what's in the sectors. At least according to S&P it's a little surprising, like, the third-largest company in the technology sector, according to S&P, is Visa. So I always find that kind of funny. But you still want to make sure that while you do want to diversify the company risk, if you have the same type of companies, then you're not doing that.

And then another easy way to diversify, too, is to own either an index fund or a fund that invests in a style that's different from what you're invested in. So if you own -- like, if you look at the whole Motley Fool universe as one big portfolio, it tends to be very technology driven, growth oriented, consumer discretionary. The Dividend Aristocrats, which is an index of companies in the S&P 500 that have been paying consistently growing dividends for +25 years, almost half of them have been paying dividends for 50 or more years or so. That's almost the complete opposite of The Motley Fool. So if you're looking for an easy stock investment to diversify from a typical Motley Fool portfolio, the Dividend Aristocrats is one easy way to do that.

Southwick: Yeah, I know. You bring up a really great point about how you -- because if you're a member of different parts of our services, you're going to have access to more and more recommendations, so it can be -- and to your point, a lot of our recommendations are in tech, consumer facing. Which is great, because, you know, a lot of our recommendations in these areas have done really, really well. So then, where do you get more recommendations for where to go? You're saying, through an ETF or an index fund or something, to fill the gaps of where your Motley Fool stocks maybe aren't fitting?

Brokamp: Well, depending on who your broker is, your broker might actually provide a tool that analyzes your portfolio. Morningstar offers one too, the Morningstar X-Ray. You can put in all your investments, and it can say, you know, you're heavy in these sectors, you're more growth-oriented, you have this much in large caps, not so much in small-caps, this much in international, this much in U.S.

And if you're looking for diversification, just find an easy index fund. For example, let's say, you have all large-cap growth, small-cap value, just get a small-cap value ETF like VBR, which is Vanguard Small-Cap Value, just for diversification. I'm not saying that that will outperform. Although, if you look back to the 1920s, small-cap value has actually been the best performing asset class; over the last five, 10 years, not so much. Certainly, cheap right now. But again, if you're looking for something to diversify your stock portfolio, look for what you have and then just find an ETF that invests differently.

Southwick: All right. What's the next one, the next do?

Brokamp: No. 2: Plan to hold the stocks for three to five years or more.

Kish: Yep. So if you've been a Fool for longer than five minutes, you have probably heard us talk about long-term investing, and that phrase is thrown around a lot. But what does that mean -- investing for the long run, being a long-term investor?

So when we're talking about individual stocks, as Fools, we tend to look at those and value them over a typically rolling three- to five-year period. So that means you need to stay invested over that time frame to allow those investing theses to play out for the company to achieve some of those goals. And certainly, there's going to be shorter periods of time where some of the stocks you own underperform. So you have to keep that long-term focus in mind. And, you know, history has shown us that the longer that you hold stocks, the more likely you are to earn positive returns.

Brokamp: Yeah. I'll just throw out some stats here that I've mentioned before. I've been looking at the U.S. stock market from 1928 to 2019. If you held stocks for one year, you made money 72% of the time; three years, 83%; five years, 87%; 10 years, 94%. If you move it out to 20 years, you almost always make money. So the bottom line is the longer you hold on to your investments, the greater your chances of making a profit.

Okay, let's move on to No. 3: Add new savings to the portfolio regularly.

Kish: Adding money on a regular basis is a nice way to ensure that you, kind of, discipline yourself into having that consistent buying practice that isn't too tied to short-term market movements. So you've probably heard it referred to as dollar-cost averaging, where you invest a smaller, regular amount of money on an ongoing basis, regardless of whether the market is up or down on any particular day.

So a lot of people, when they have money to invest, they want to try and time that for a down day or a down week so they can buy in at a lower price point, which makes sense. But what happens is that they end up, a lot of time, sitting on the sidelines trying to time the market, which is incredibly difficult to do in the short run. So getting in the practice of adding money on a regular basis really forces you to get your capital invested and put that to work by taking that whole market-timing component totally out of the equation.

Brokamp: I read a fun little illustration on a website called PortfolioVisualizer.com, which is all kinds of great tools, I highly recommend. But we all heard that the stock market earns 10% a year over the long term, historically. But I looked at the S&P 500 from 1999 to 2019, so the past 20 years, S&P 500. If you invested $10,000, you actually earned just 6.6%. We've actually had below-average returns over the last 20 years. But still, that was good enough to turn your $10,000 into $38,000.

But what if instead, you invested $10,000, but you added $100 every month? Your return went up from 6.6% to 8.2%. That's the value of just gradually adding more money. And, of course, your $10,000 grew into $130,000. Most of that was because you kept adding money, but you also had a higher return. And I ran that simulation over other time frames, and every time frame, basically by adding money regularly, you boost your overall returns by another 1 to 2 percentage points.

I will say that if there's one thing about our rules, and maybe The Motley Fool's mentality, in general, is that we are focused on people accumulating money. Someone who's listening to this podcast right now or who's read our rules and they're retired, they might think, "Well, what about me?"

And I would say, the most important thing there is, what works for people who are accumulating money can work against you when you're retired, because you're gradually selling money off. So the most important thing, I would say, that retirees have to think about, if you can't add money to your portfolio, and most can't, the most important thing is to avoid selling when the market is down. And that's why having that five-year income cushion is so important. So that when the market is down, you can avoid selling and let your stocks recover, which historically, they always have.

Southwick: All right. And we are on No. 4.

Brokamp: No. 4: Be prepared for stock market declines and pounce on them!

Southwick: Oh, I'm pretty sure you guys just got done telling me not to time the market. [laughs] Did I dream that?

Kish: You did not. That did actually happen. [laughs] But there is a difference between timing the market and then seeing a good advantage, good market movements, and then acting on that.

So we've seen in history that the stock market will go up more often than it goes down. So I think, historically, it goes up for every two out of every three years, but it will go down sometimes by a lot, sometimes very quickly, as we saw earlier this year. So you have to be prepared for that and have to expect that declines will happen, and they do happen with some regularity.

But the key to getting through that is to, as Bro just said, keep any money you need in the next few years out of the stock market. So you don't need to sell when prices are down and then you can sit tight through that bear market.

And then if you do have cash that you want to add, that you wanted to deploy if there was a particular stock you had been eyeing, that you're thinking about, a market decline can be a very good buying opportunity. You might not buy at the exact bottom, you won't time that exactly right, but if a company was a good buy at $30 a share, and nothing fundamental about that company has changed, you know, that company is still probably an even better buy now at $25 a share.

Brokamp: Just bringing some historical numbers here. This comes from a group called Compound Advisors; and just how often the market goes down by a certain percentage. So since 1928, we experienced a decline of 20% on average every four to 5 years; 30%, every 9 years; 50% every 20 years. Although, we have seen two so far in the first -- we saw two in the first 10 years of this century. And then a decline of 80% every 100 years. And that's just historically looking at the Great Depression when stocks actually went down 85%.

Hopefully that won't happen again, but if you're going to invest in the stock market, you have to expect that you're going to see your portfolio cut in half; it's just, kind of, the price of admission. And if you can't take that much of a decline, then that's where you decide maybe you have a little bit on the side.

And I mentioned earlier that most of The Motley Fool services recommend that you have about 10% of your money in cash, and most of that is to take advantage of good opportunities, of these sudden times when stocks become very cheap. Could be the overall market or could be a company you really like. But having that dry powder on the side is important to being able to take advantage of those situations.

Southwick: Yeah, I guess everything is just kind of weird right now, right? Like, we've spent the last six months talking about how we don't understand what the stock market is doing, at all. Like, literal global pandemic, and despite a little bit of a blippity-blip, everything is just like hunky-dory. Like, I'm sorry, I don't know what it means to have dry powder and wait for a good opportunity. Like, when will that be? I don't know. Because if a global pandemic isn't going to cut the market by 50%, what will? I don't understand what's going on, Bro.

Brokamp: [laughs] Well, first of all, nobody does. I mean, if you were to look for reasons why it's happening, the No. 1 reason everyone cites is it is stimulus money and support from the Federal Reserve, which is going into buying all kinds of assets, mostly in the bond market, but it's now buying high-yield bonds. I was reading an article about how the Fed is like one of the top 10 holders of a broad range of bond ETFs. And basically, everyone feels like, if they're going to do that, if stocks get too bad, at some point maybe they'll even go and buy stocks, like, they have our back.

That said, I don't understand it either. I mean, we are now at a point where the stock market is just about where it was at the end of 2019, but earnings have collapsed. Companies are not worth as much as they used to be.

Southwick: Oh, yeah. Disney can be like, hey, we didn't lose nearly as many bazillion dollars as we thought. And then Wall Street is like, fantastic! Yes, yes, great, skyrocket. Whereas, like, I remember the days where people would be like, "Oh! Apple didn't beat expectations as much as we wanted them to." And their stock would take a hit. Now, it's just these low expectations that are sending stocks that were already high even higher. Bro, tell me what I'm supposed to do! [laughs] I mean, what do I do?

Kish: It's all the more reason to keep focused on the long run. I think that that sentiment is very common right now. There seems to be a disconnect between the economy and the market. And in the short run, none of us know what's going to happen or where stocks are going to go. So it's just all the more reason to stay focused on the long run and keep focused on those longer-term time periods that Bro was just talking about to kind of save a little bit of your mental sanity. [laughs]

Brokamp: Well, I'll just explain what I've done, and I've mentioned this on the show before, right? So for years, I've been saying, the market is highly valued. It doesn't mean I sell everything, but what it did mean is I stopped reinvesting my dividends and I let them accumulate in cash. And I aim to have about that 10% on the sidelines.

When the market went down, then my cast became 15%, 18%, and then I bought more stocks. But then the market came back again, now my cash is slower. So I rebalance. I sold a few things and I'm going to stop reinvesting my dividends.

And that's what everyone should do. You decide on an allocation that you're comfortable with: stocks, cash, bonds, U.S., international. And once it becomes significantly out of whack, then you rebalance. But as far as I'm concerned, that's the only thing even close to market timing that I think has any reasonable chance of success.

Southwick: Uh, just tell me which stocks are going to go up. [laughs] Am I right, Rick?

Brokamp: All right. So is that a good segue to the fifth and final item here?

Southwick: Yeah, let's end on some good news, huh?

Brokamp: Okay. No. 5: Target excellent returns over a 10- to 25-year period.

Kish: Yeah. And that's the other part of being a long-term investor. You talked a little bit earlier about holding stocks for that three- to five-year time frame, and that's one way to look at it, but when you think about, kind of, the overall goal of being a long-term investor, you should probably consider that an ongoing, lifetime type of goal. It's a mindset that you should cultivate.

So when we talked about how the longer you hold stocks, the greater your odds of experiencing positive returns. And that effect is really just magnified that much more when you're looking over 10, 20, 30 years, so.

And it's not just a race to make money until you retire. Retirees, Bro mentioned earlier about, you know, having to look at the portfolio in different ways, some different needs there. Retirees also need a long-term portfolio to sustain them, probably for decades for most people.

So that -- when you look at it, is really where true wealth is earned, it's over the long run and over decades and over a lifetime. And that's why we advocate so strongly for staying invested and sticking to your financial plan, even when things get tough, even when things get confusing, and even when we are not really sure what's happening in the market in the short run.

Brokamp: And most financial planners recommend that you assume you're going to live to 90, 95, or maybe even 100, depending on your family history and your health status. And when you look at that, even someone who is 65, 70, 75, 80, you have a decade-plus time horizon for some of your money. And over that period, you've got to make sure that your money lasts and your money grows, because it's got to keep up with the cost of inflation. Because eventually you're going to turn that money into buying things, and those things are probably going to cost you more in the future.

So when you think of "money has got to grow, money has got to last, it's got to exceed the cost of inflation," stocks are really the only thing you can do that with now. You're not going to get that from a 10-year Treasury yielding 0.5%. Which is why, getting back to something I mentioned last week about the RYR [Rule Your Retirement] model portfolios, when we reduced the bond allocation, we put it into solid dividend-paying stocks, knowing that the prices will go up and down, but historically, the dividends paid by a good collection of income-producing companies, it's pretty consistent, grows along with inflation. And when you look at something like the Dividend Aristocrats index yielding 2.5%, it sure looks a lot better than the 0.5% you get from Treasuries.

All right. So that is our five dos. Now, when we discussed this or promoted this on the website on Fool.com, we actually asked our readers to take a survey of whether they agreed with our seven don'ts and our five dos. So I just thought I'd read the results.

And it turns out that most people agree. So as of recently, 92% of people agreed with our seven don'ts and five dos; 7% not sure; 1% disagree.

Now, we don't know what the unsure and disagree were disagreeing with or not sure about. Anyone want to take any guesses? My first reaction is, if there's any of these that I would change or augment a little bit, I would say, in the times where we say you should own at least 15 stocks, I would probably increase that to 20, 25, just for me, to be more comfortable. But I don't know if that's what people were disagreeing with.

Anyone want to speculate what else people might be disagreeing with?

Kish: Yeah, for the record, I agree with you. I think focusing more at 20 to 30 is kind of the sweet spot where you're, I think, going to get most of those diversification benefits without going too crazy into the names. Beyond that, who knows? Maybe people feel that they don't need to have a long-term investing horizon. That's probably one of the most common things that I see, is people want to have some short-term investments, some things that they want to own for a little while, make a little bit of profit, and move on. That's very possible. And some people can do it, while most can't, which is why we advocate for investing in the long run. But that's just a guess on my part.

Southwick: I don't know. Do we know if most of these people who answered this survey are, kind of, dyed-in-the-wool Fool community members? Because our community is notoriously a little more risk-taking, like, I can imagine -- and the people in The Motley Fool community who are into options really love options. So I could see some people being, like, "No, I am 100% in stocks. It works for me, I'm fine." Or "No, I think you should do options as soon as you possibly can." I could see maybe some of our more aggressive community members having some, being like, nah, I got this.

Brokamp: There is a deep, deep hatred of cash and bonds among some of our investors. And you could understand that. I mean, if you've been investing for a long time and you have several experiences of the market going down but then coming back up again and reaching new highs, always making money over the long term, dividend yields much better than bonds, why would you have anything outside of the stock market?

And depending on your situation, especially if your house is paid off, maybe you're going to get a pension, maybe you have so much money -- you know, your portfolio is $5 million, but you only need a $100,000 in retirement, it makes total sense. In fact, I would say that you could feel perfectly fine doing that.

Well, that's it. Those are our seven don'ts from last week. These are the five dos from this week.

Amanda, thanks for joining us.

Kish: Absolutely. It was my pleasure.

Brokamp: Maybe you'll come back later and talk about some of the other things you're working on, because I know you're also working a little bit on asset allocation, also the mix between individual stocks and index funds, different houses, different matrixes, all kinds of fancy stuff is going to come out of your section of The Motley Fool in the nearest future.

Kish: Yeah, there are some things we're working on. We're really excited about getting some more of that allocation guidance, kind of that top-down portfolio view. So that will be coming our members' way very soon, and we're very much looking forward to getting that out to everyone.

Southwick: Well, that's the show. It's edited patiently by Rick Engdahl. [laughs] Our email is Answers@Fool.com. Drop us a line. I'm sure we have a mailbag episode around the corner. Again, I don't know, time has lost all meanings. For Robert Brokamp, I'm Alison Southwick. Stay Foolish, everybody.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.