All That Glitters / Tips for Getting Inscribed in the Book of Gains

Shana tova. Summer is ending, the kids are back in school, the New Year is approaching, and our leaders are telling us that the economy is growing again. The stock market has all but fully recovered, yet analysts argue that there's more room for gains, in bonds and corporate bonds as well, at least for people prepared to invest for the long run.

Do you feel ready to come out of your bunker? Take out the cash you'd stashed and do something more exciting with it? If so, here are five tips to keep in mind.

Before making any investment decision, check the fees you have to pay, and get them down to absolute minimum. You may think that when share prices and bond prices are swinging madly, it doesn't matter - but it does.

Because of the principle of compound interest, a portfolio with annual management fees of 1% of assets is completely different from a portfolio with annual management fees of 2%.

Take an portfolio with NIS 100,000. At 5% returns a year, in 20 years you'll have made NIS 271,000 - but if you lower the fee by 1% you'll have NIS 331,000 after 20 years. That's a difference of 22%.

Naturally, the investment consultant will say those are the terms and that's that. He may even show you documents to that effect, but the truth is all fees are open to negotiation.

After the crash of 2008 and rebound in 2009, it's clear to every saver in town that the financial markets are volatile places and nobody can assure you of a certain average yield, be it over five years or 20. The only thing they can assure you is that every tenth of a percent more that you pay in management fees will reduce your pension significantly over the years.

Another thing: It isn't enough to negotiate the fee once. Keep a beady eye on your portfolio and make sure you aren't being overcharged, that your investment manager or bank didn't just jack up the fee one day.

When confronted, they may insist that the low fee you negotiated was just for the first year, or there was a change in investment policy - there are any number of excuses to raise fees. So negotiate again.

Even if your investment adviser tries to suggest differently, experience teaches that throughout the West, in whatever sector you choose - investment by index is better than almost any managed mutual fund or portfolio.

During the last year, a lot of mutual funds beat their benchmark indexes. Their managers may try to argue that the global economic crisis debunked the myth of the "efficient market," on which the entire principle of a market portfolio is based.

(The efficient market theory suggests that at all times, market prices reflect all the information at hand, and any new information will immediately be incorporated into the price. According to this theory, the only way to outperform is by increasing risk.)

But you can't argue with long-term statistics. The longer your investment horizon, the more it appears that mutual funds can't beat their benchmark index. Why not? Read section 1 again.

It turns out that exchange-traded notes, which are investment vehicles that track indexes, charge much lower fees than mutual funds or portfolio managers do. Over time, therefore, a fund manager charging 2% of assets each year will find it all but impossible to beat a passive fund charging 0.2%.

American investors have been trained to realize that high inflation can wipe out their capital gains. Israelis are less on the ball. That's because for decades, the bulk of their investments were put into bonds linked to the consumer price index, mainly government bonds. Therefore, differences between nominal yields and inflation-adjusted (real) yields were not great.

But investment patterns in Israel have changed. Portfolios now contain hefty components of shares and bonds that aren't linked to the CPI. Moreover, in recent months a large number of companies tried to issue unlinked bonds.

But what may be good for companies isn't necessarily good for savers. These days it's dangerous to invest without protection against inflation. Around the globe, governments have issued vast piles of public debt. Practically the only way to diminish national debt is to decrease the value of money, meaning allowing inflation to rage.

That is exactly what economists are afraid will happen. It is a nightmare scenario.

If only 20% of your investments portfolio is hedged against inflation, and inflation rises to 6% or 7% a year, as many economists think will happen - then your real gains will vanish completely.

A cautious portfolio has a large component of vehicles tied to the CPI.

When that smiling investment adviser at Investment Bank X tells you that he's going to build a special portfolio specially for you - don't believe him. At any time, every investment bank has a given investment strategy and specific securities in which they believe. Everybody they handle will get a great dollop of the securities in which X believes, like it or not. Which means all the investment managers at X will stampede that stock, which will then rise, and may then fall.

If you spread your money among more than one investment bank, you reduce your risk of disappointment.

It's hard to sit on money at the bank. Nominal interest rates are at rock-bottom these days, and in real terms, your money is eroding. Friends gloat about their gains and there you are with some silly deposit. You're dying to get into the game and the only thing that's stopping you is where exactly to put your money.

Or you could wait for a better opportunity.

September and October are traditionally considered to be terrible months on the markets. Some blame it on tax considerations in America. A lot of players think the rebound overshot and asset prices are going to beat a sharp retreat.

The first rule in investing is, don't lose money. As Warren Buffett has been known to quip, the second rule is: don't forget the first rule.

We seem to have passed the worst of this financial crisis. But a lot of the factors that lay behind it are still with us. The next three months could be a very dangerous time and it's no disgrace to sit tight and wait, rather than jump into the floodwaters right now.