Seven Investment Rules to Live By — a Book Review of “Investing for Dummies”
After Two Decades, Money Basics Don’t Really Change
I’ve been a personal finance junkie ever since my $5 weekly allowance. Later supplemented by mowing lawns and other odd jobs, most went to savings, usually for toys that wouldn’t fit on Santa’s sleigh (according to my parents). By high school I was routinely reading the Dummies guides on money management, and once in college I had the confidence, and the cash, to begin investing in the market. That my interests eventually led to a career in private equity, and later corporate finance, surprises few in my family.
Recently I re-read “Investing for Dummies” by Eric Tyson and found many familiar topics from 25 years ago, as well as some new. A few highlights:
1. Your career = most valuable “asset.” Most people know they need to replace the roof of their house every so often. Expensive and time consuming, rarely does it increase the value of a home. However, it will help keep your home from losing value. Same with your career. Continue to invest in your skills over your lifetime to protect your most important asset.
2. Save 10% of your income. Make a habit of living on 90% of your income. As Tyson observes, if you can save 10% of your income over your working years, you are “probably saving enough to meet your goals.”
3. Compound interest. Compound interest works almost like a plane’s autopilot; enter the right settings and the device will safely take you to your destination. Similarly with investments, you just need to contribute into a couple of mutual funds and let time do the rest.
4. Your age and time horizon are important. The rule of thumb is “110 minus your age” for the target percentage of your retirement investments in equity mutual funds. The more time you have, the better you can ride out the market’s many ups and downs.
5. Don’t sell during a downturn. No one can call the top or bottom of a market. The author warns that investors who sold during the recent recession missed an incredible market run in the following years. Keep 3–6 months of living expenses in cash as emergency savings to avoid the need to sell your investments for short-term needs.
6. Watch the fees. Operating expenses, trading costs, advisor fees, distribution expenses, taxes, you name it, there are many drags on your investment returns. Many will be invisible to you, but their impact will be very real. In general, the lower the fees, the better.
7. Set it and forget it. Whether professional or amateur, most investors can’t beat the market. Ignore TV, magazine and podcasts that discuss market performance and latest trends. What you hear today won’t make a bit of difference over 20 or 40 years.
Investing basics are not difficult, which is convenient because it is a skill most of us need. By following a few guidelines you can build a nest egg to carry you comfortably through 25 or more years of retirement. Start now and your future self will be glad you did.
Thanks for reading. Comments and suggestions for other topics welcome.
Below are reviews of popular titles in the financial space:
· John Bogle (the co-Founder of Vanguard) “The Clash of Cultures: Investment vs. Speculation” here.
· Ric Edelman, the founder of Edelman Financial, “The Truth About Money: Everything You Need to Know About Money” here.
· Lars Kroijer’s “Money Mavericks: Confessions of a Hedge Fund Manager” here.
Below are a few posts on my experience with money and the financial industry in general:
· “Money Advice for Millennials: How to Save for a (Not So) Distant Future”
· “How Bank Fees are Nudging Us to the Right Answer”
· “Your 401(k) and the New Rules of Retirement Savings”
· “Retirement Savings and Healthcare Costs: A Balancing Act”
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