10 Rules: Defer Taxes

December 27th, 2006  |  Published in Retirement  |  Comments Off on 10 Rules: Defer Taxes

This final tip in Forbes’ ten rules for building wealth starts dabbling in tax implications and how income and capital gains taxes will affect you investment decisions. The two tips they gives:

  1. Be aware of whether your sale will be a short term or long term capital gain. A short term capital gain will be taxed at your income tax bracket whereas a long term capital gain will be taxed at a mere 15% – regardless of your income tax bracket.
  2. Sell losers before the end of the year and they can offset winners. “…It can be a good move to sell losers in your portfolio to take advantage of the annual $3,000 capital-loss deduction limit and offset any capital gains on your winning picks.”

Source: Fortune

10 Rules: Reduce Credit Card Debt

December 27th, 2006  |  Published in Retirement  |  Comments Off on 10 Rules: Reduce Credit Card Debt

This tip in Forbes’ ten rules for building wealth starts moving away from retirement planning in the strictest sense and starts dabbling in good personal finance advice: reduce and avoid credit card debt (and all other debt too, but start with credit cards).

Forbes recommends ranking them by interest rate and paying off the highest rates first (duh), leave the low interest debt for the end and even then consider just making minimum payments and putting the funds towards other things. An interesting bit of trivial: “Supreme Court Justice Clarence Thomas was still paying off his school loans when he joined the bench.”

Source: Fortune

10 Rules: Watch the Watcher’s Prices

December 26th, 2006  |  Published in Mutual Funds  |  Comments Off on 10 Rules: Watch the Watcher’s Prices

A mutual fund usually has an expense ratio, that is, a percentage of its assets that it collects for administrative fees and “expertise.” The actively managed funds generally have higher fees because you’re paying the manager to be good at his job. Passively managed funds generally have lower fees because you’re basically paying for the administrative fees. Just as you should know how much that sweater or that cup of coffee costs, you should know how much you’re paying your brokerage for your funds because it adds up in the long run. Forbes’ eighth tip in their ten rules series is that you should keep an eye on the fund fees.

When you review the fees, it will be broken up into administrative and management fees. Forbes recommends not getting a fund with a management fee greater than 1%. Here is where the ten rules start to confuse me… if Forbes recommends that you should not try to beat the market and that you should avoid high fees, why don’t they just come out and say that you should invest in index funds? Those funds match the market perfectly and they usually have incredibly low fees.

Source: Fortune

10 Rules: Stocks, Stocks, Stocks

December 26th, 2006  |  Published in Asset Allocation  |  Comments Off on 10 Rules: Stocks, Stocks, Stocks

The seventh tip of Forbes ten rules for building wealth deals with “proper” asset allocation and that you should be investing more in stocks and less in anything else. Their rule of thumb? 120 minus your age should equal allocation percentage in stocks and the rest should be put in bonds.

Stocks are usually more volatile than many other vanilla investments (unless you start playing in the big pool with derivatives) but the idea is that what happens the next few years won’t affect your long term plan, which will come to fruition in thirty or forty years. This is also the concept behind target retirement and lifecycle funds, to move assets away from more volatile investments like stocks as you near retirement.

Source: Fortune

10 Rules: Save It Automatically

December 23rd, 2006  |  Published in Retirement  |  1 Comment

The only way to guarantee that something happens regularly is if you make it automatic (duh!) and that’s the focus of this sixth tip of Forbes ten rules for building wealth: make saving automatic. This is the premise of David Bach’s The Automatic Millionaire and it’s definitely a tip that, twenty years from now, you probably will have wished you followed (so stop reading, go make your savings plan and retirement plans automagic).

How can you make it automatic? Many banks have the capability to setup a recurring transfer, say a hundred bucks each month to a high yield savings account; so if you set something up like that, before you know it you’ll be sitting on a nice hefty chunk of change “for free.” Another option is to ask your company’s payroll department to split your direct deposit and this is something a lot of companies do offer, usually a maximum of two, so that’s another option to consider. Either way, if you make it automatic, you can guarantee that it’ll get done each month. (If that’s not a Yogi-ism, I don’t know what is)

Source: Fortune

10 Rules: Don’t Chase Trends

December 23rd, 2006  |  Published in Investing  |  Comments Off on 10 Rules: Don’t Chase Trends

One of things that a lot of people do, without even thinking about it, is the topic of this particular tip. Human beings have a natural herd mentality and so when there are trends, people want to be a part of it whether it’s bell-bottom pants or its investments. During the dot-com bubble that burst in 2001, money flowed into the industry like crazy. This past year, money flowed into energy and gold like crazy. When ETFs were first introduced, money jumped from mutual funds to ETFs like it was going out of style. The fifth tip of Forbes ten rules for building wealth is that smart investors should not chase trends.

The logic behind this tip is that you’re in it for the long haul and that you shouldn’t switch your long-term strategy for the next hot thing that comes along. Not only shouldn’t you make these course corrections because its not part of your grand plan (and because by the time you see it, it has already peaked), it’s also expensive to be jumping around to the hottest thing.

This is what Forbes says you should ask yourself if you do decide to jump:

Can I describe how it works in plain English? If not, start your research at Investopedia.com. Why is it so popular right now? If the answer is “Paris Hilton bought some,” best to stay away.

Source: Fortune

10 Rules: Don’t Try To Beat The Market

December 23rd, 2006  |  Published in Investing  |  Comments Off on 10 Rules: Don’t Try To Beat The Market

I wholeheartedly believe in this fourth tip of Forbes ten rules for building wealth of not trying to beat the market. Honestly, you have better things to do with your time than research investments and you should be doing those, instead of checking PE ratios, growth rates, and the like.

Strangely, Forbes focuses a lot on asset diversification and portfolio balancing in this tip and a little less on convincing a reader to go with some index funds. While I think the underlying idea is that you go with funds anyway (building on the idea of keeping things simple), they don’t make mention of it in this particular tip.

One tool that they mentioned that is worth checking out is Morningstar’s free Instant X-Ray tool.

Source: Fortune

10 Rules: KISS – Keep It Simple Stupid

December 23rd, 2006  |  Published in Investing  |  Comments Off on 10 Rules: KISS – Keep It Simple Stupid

The third tip of Forbes ten rules for building wealth is one that, I think, applies to almost everything in life: keep things simple. Forbes recommends that you choose three or four index funds that will give you some good exposure – that is, a nice mix of risk and reward instead of all in one asset class (though most funds will be a mix of stocks and bonds, they say an ETF is the way to go if you want to dabble in commodities) or geographic area.

One tip that I think is worth investigating are Target Retirement funds that change their allocation over the years, and will automatically rebalance the assets for you, as you get closer and closer to retirement. I think that target retirement funds are definitely very popular nowadays and they are the definition of KISS.

Source: Fortune

10 Rules: Use Your 401K

December 22nd, 2006  |  Published in 401K  |  Comments Off on 10 Rules: Use Your 401K

This is the second tip of the ten in Forbes ten rules to building wealth and it works nicely with rule 1: start early, because contributing to your 401K should be an automatic decision when you start a new job.

I don’t want to beat this discussion to death, because every personal finance blogger has discussed 401k’s, but you really should contribute to your 401k, definitely if you have a company match. In addition to the fact that saving for retirement is a prudent thing to do anyway, you are able to save more (because the taxes are deferred), which means there’s more of it to grow with.

If you’re not already enrolled in your company’s plan, stop reading now and sign up. Since you’re putting in pretax dollars, a 401(k) is an unrivaled savings vehicle, and passing up an employer match is – literally – giving up free money.

Source: Fortune