Fundamental Rules for Investing
Many people let their emotions get involved in managing their money and it can lead to financial hardship. If you can follow these five simple rules to investing, it will help get you back on track to securing your financial future.
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Annual Financial Physical
We are in a marketplace where things are changing at an increasing pace. Interest rates change, the stock market changes, offers at local banks change. In addition to the changes around us, we are changing. We are a year older, our family situations may have changed, and our income and job may have changed. You need to take these changes into account at least annually and review your financial assets. This way you can recognize adjustments early before they become a large problem.
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Rule of 100
We believe in age appropriate investing. That implies that you need to reduce the level of risk with your financial assets as you get older. There is a rule of age appropriate investing, called the rule of 100. Subtract your age from 100, and the resulting number is the maximum percentage of your portfolio that you should have at risk. The rest of your portfolio needs to be in what we call sacred assets, or assets that have protection that you will not lose your principal.
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Limit your losses
If you have assets in your portfolio, like common stocks, that do have down-side risk, or the possibility that you can lose your principal, you need to protect yourself from large sudden drops in price. You should set a limit so that if the price of your stocks drops by 8%, an order will be entered to sell the stock. This accomplishes two things. First, you do not have to worry about watching the price of all of your stocks on a continual basis. Secondly, it helps remove some of the emotion from investing, something we strongly recommend.
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Maximize your contributions
The more you contribute to your retirement plans now, the better you will be in the long run. By increasing your contributions, you can lower your current taxes, have more money growing on a tax deferred basis, and be able to accumulate more assets to enable you to have a comfortable retirement. Take advantage of the current contribution limits.
If you have a company match, as in most 401(k) plans, you should always contribute the maximum amount the company is matching. If your employer is contributing $.25 for every dollar you contribute, that is an automatic 25% rate of return on your investment. You can't pass that up!
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Don't pay taxes needlessly
Do not pay taxes on income you aren't spending. If you are generating taxable income from your investments, and then turning around and reinvesting the income, you need to look at better options. If you do not need the income for current living expenses, you are much better from a tax standpoint to try and defer the taxes on the income. There are plenty of investment vehicles that allow you to have tax-deferred growth so your principle, interest and tax savings are working for you.