Rules to Grow Rich By - Investing Tips - Money Magazine at Catch a Gideon

November 30th, 2006 by digerati

6. All else being equal, the best place to invest is a 401(k). Once you’ve earned the full company match, max out a Roth IRA. Still have money to invest? Put more in your 401(k) or a traditional IRA. “All else being equal” is one of those phrases that describes something that never exists completely. It’s very rare that all else is equal.

However, this describes my strategy. By investing 4% in my 401(k), I get the full company match. I max out my Roth IRA next, and with the leftover income, I invest 8% more of my salary into the 401(k). I may end up cutting back as my cash flow is tight. I could use some more breathing room. I’d like to fund my 401(k) to the maximum some day, but that would require a higher salary.

7. To figure out what percentage of your money should be in stocks, subtract your age from 120. I just mentioned this in another post. The old rule used 100 instead of 120, but someone decided that with people living longer in retirement, that wasn’t enough equity. By this logic, 10-year olds should have 110% of their funds in stocks. I’d like to see a 10-year old who can pull that off.

8. Invest no more than 10% of your portfolio in your company stock – or any single company’s stock, for that matter. This is mainly for company stock. You income is already dependent on your company, so also assigning such a big chunk of your money to your own company stock just increases the risk. There are tons of reasons why you shouldn’t be heavily invested in your own company, and that’s a topic for some other time.

10% is probably too much to let ride on any one investment if you’re looking for diversification.

9. The most you should pay in annual fees for a mutual fund is 1% for a large-company stock fund, 1.3% for any other type of stock fund and 0.6% for a U.S. bond fund. This rule sets specific limits. Annual fees eat away at your returns and they should be avoided as much as possible.

10. Aim to build a retirement nest egg that is 25 times the annual investment income you need. This is based on the research that shows that you can safely withdraw 4% from an equity portfolio every year without your funds depleting over the long-term. If you need an income of (inflation-adjusted, let’s say) $100,000 a year in 2030 when you retire, your funds invested in stocks should be valued $2.5 million if you want your funds not to deplete.

11. If you don’t understand how an investment works, don’t buy it. Don’t bother with futures options, and don’t let your broker talk you into them, unless you have done some indepent research and you know what you’re getting into.

If a stranger wants a few thousand to invest in his new business, you’re not oging to give him the money without determining what it will be used for, checking his business plan, and making sure there’s a good chance he’ll be able to pay back as promised. The same theory is true for any type of investment, especially those beyond the basic stock or bond.