Simple Investing Techniques

Posted by JohnP 08/07/2007 at 15:44

Investing for retirement made simple. I’m not an investment advisor nor do I have any certifications related to investing.
If you don’t enjoy working with numbers, tracking down "cheap" companies selling at a good value and monitoring them daily, weekly, monthly, then here’s a simple set of ideas for doing reasonable well investing for retirement.

  • Pay yourself first – whatever the monthly amount is that you are going to invest, consider it a bill just like your rent or mortgage.
  • Save at least 10% of your GROSS income for retirement – this applies to both husband AND wife in a marriage. If you are single, you need to save more.
  • Start saving early – it is amazing the difference that starting at 25 years old makes when compared to starting at 35 years of age. At age 55, the total amount is staggering.
  • Asset allocation (putting a little money here and a little money there) is very important to ride the ups and downs for each part of the market.
  • Unless you are 5-10 years away from retirement, avoid bonds. Some people will disagree with me on this.
  • Ok, the target asset allocation for someone under 50 years old (in my opinion) is:
    • 50% Large CAP stocks (an S&P500 fund or ETF) These are the core of your investments, steady, predictable growth well above inflation is needed. If you want to be a little riskier, find a "value" Large CAP fund or ETF. Morning Star LrgCAP Funds
    • 30% Overseas (EFT or worldwide fund) You might ask why? Growth rates overseas are likely to be higher than in the USA over the next 30 years, IMHO. Morning Star Worldwide Funds
    • 20% Small/Mid CAP stocks (ETF) Smaller companies tend to grow faster than large companies, but they also tend to fail more. Morning Star Small CAP Value funds
  • Be certain to take enough risks – Certificates of Deposit are not risky enough for your retirement, unless you are retiring within 5 years. Then you should ladder your CDs every year so that for any 5 year period, your income from your investments is completely guaranteed.
  • Don’t put any money into any stock, mutual fund or ETF that you might need in the next 5-10 years. Sufficient time is important for risk management.
  • Avoid market timing, something called Dollar Cost Averaging really does work – basically, this means send the same amount in every month. When the price is high, you buy fewer shares. When the price is low, you buy more shares. Simple. Be certain to buy those stocks that are cheap with your monthly inputs. AND don’t forget diversification! Never forget that.
  • If you aren’t willing to do the time monitoring and researching, stay away from HOT TIPS from the gym and water cooler.
  • Save for your retirement before saving for your child’s college education – college loans are easy. There’s no such thing as a retirement loan.
  • A good enough guess for how much money you should have before retiring is 12x your annual salary. $50K calculates to $600K needed at retirement. There are many, many assumptions and your needs will be hirer or lower based on too many factors to assume. More conservative estimates go with 25x your annual salary – that’s $1.25M. Which do you think can better weather a 10 yr bear market or critical health issue?
  • Here’s a retirement calculator that might be helpful to estimate how much you need to save to reach your goal – both IE and MS-Excel is required for it to work (sorry, it was too easy for me using these tools).
  • Try to keep fees to a minimum by using a discount broker with lots of No Transaction Fee Mutual Funds and low fees to purchase stocks (Under $13 per trade). Avoid churn.
  • Never buy a fund that requires a front-end or back-end load or 12b fees.
  • Avoid high fee ETFs and Mutual Funds with fees over 1%.
  • Look for top ranked mutual funds followed by Morning Star – try to purchase the mutual funds in the top 25% of short term and long term performance for the type of asset class you are trying to get. Mix Value and Growth AND Large, Mid, and Small CAP companies. Asset Allocation is critical.
  • Be certain that you have 6-12 months of living expenses saved and available outside your retirement investments.
  • You should be in good overall financial shape before you begin investing – no credit card debt, no long term car loans (over 3 years total), you get the idea. If you aren’t certain, you have a problem to be solved.
  • Never have more than 20% of you total investments in a single investment – once you have $50K total. This includes the company stock that you work at. I count my annual salary towards this 10% rule and don’t have any company stock where I work – my salary is enough of an investment.
  • Your house is only an investment if you can sell it. You will still need someplace to live.
  • DO review your investments every quarter and verify you are in investments in the top, say 30% of the class for performance.and DO rebalance your portfolio annually to get back to the 50/30/20 allocations (approximately).
  • If you do these simple things, anyone can retire with over $1M saved by saving $250/month. It just takes consistency over the 30+ years of saving. Average returns in your investments will get you there.
  • Keep the market ups/downs in perspective with this graph

Some helpful links: