by Marc Bastow | September 26, 2013 11:35 am
Try to fit all the best investment advice — retirement or otherwise — that you’ve ever received on a 4×6 index card.
It sounds impossible, but that’s exactly what University of Chicago social scientist Harold Pollack did after a chat with personal finance expert Helaine Olen, author of Pound Foolish: Exposing the Dark Side of the Investment Industry.
The thought behind it — some of the best pieces of financial advice are also among the most simple, and that a short list of such guidance would be more than enough to put you ahead of where most Americans are today.
It’s an exercise well worth pursuing — we tend to get caught up in the weeds trying to figure out our finances, and proactive planning tends to become reactive.
I think Pollack’s index card is an excellent example of this. Myself? I actually have just three simple rules I try to live by as I plan for retirement:
I agree with Pollack to an extent — it’s important to contribute to your 401k, though it’s not always realistic to max out your contributions all the time. Life happens, as we all know.
Still, it’s a new retirement world out there — defined pension plans are virtually extinct, so for most people, 401ks are the best vehicle they have to save toward retirement. So once you begin participating, contribute as much as you can, at least trying to meet the maximum level at which an employer will match or add some percentage of your contribution.
Again, though, don’t max it out — a “promise” to put in the most allowed under your 401k plan is a recipe to disappoint. Do the most you can while giving yourself a little wiggle room.
Note: A little less simple is staying active in the management of your retirement portfolio, but it’s still worth it to review your holdings regularly, understand how much of your money is going toward fees, and know what fund options you have available. These are critical parts to the plan.
This deviates a bit from Pollack in that it encourages you to buy individual stocks. Still, I feel dividend stocks should be the bedrock of your retirement portfolio.
Why? For one, they regularly dole out payouts that in turn help you establish a regular cash flow (or at worst, help hedge against stock losses). However, contrary to some common misconceptions, they perform over the long term in price appreciation. Companies like Coca-Cola (KO), Proctor & Gamble (PG) and McDonald’s (MCD) are all a testament to that.
Also, with dividend stocks, you can enjoy the power of compounding by reinvesting those quarterly payouts. Plus, as these stocks increase their payouts over time, your initial yield on cost will continue to rise.
This one must be accomplished in a number of ways, but the point is not to do anything that could seriously jeopardize your hard-earned retirement money.
Avoid penny stock schemes. Stay away from any investment claiming to be “risk-free,” or that promises outsized returns for the life of the investment. Don’t sign anything unless you’ve read and understand what you’re signing.
But perhaps the most difficult thing to do in the moment is to not put your eggs in one basket. Don’t push all your money into one stock, nor one business, nor one sector, nor even one asset class. It can work, but likely not in perpetuity.
Best of all, you don’t even need an index card for all these — a torn-off corner of napkin will do.
Marc Bastow is an Assistant Editor at InvestorPlace.com. As of this writing, he did not hold a position in any of the aforementioned securities.
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