Is it possible that all the investing advice you will ever need fit on one 4×6 index card? University of Chicago professor Harold Pollack thinks it does. Here’s the card:
As you work down the list, it seems as though Professor Pollack might have a bit of redundancy in his list and some political grandstanding. As such, I’m mainly going to focus on the top portion of the index card.
1. Max your 401(k) or equivalent employee contribution.
I have repeatedly suggested this. This is an excellent starting point. The money that you invest can either decrease your current tax basis, via a traditional 401(k) fund, or eliminate future tax issues on these investments by using post tax dollars in a ROTH 401(k). Further, many employers will match a portion of your investments; typically the corporate match is 50 cents on the dollar or dollar-for-dollar on the first 3% or 6% of your investments. That means that your employer will provide you with a 1.5% to 6% raise every single year over and above your other compensation. Investing in your employers 401(k) or equivalent plan is excellent advice. However, you should try to get yourself out of debt before investing your money; try to pay off any high-interest consumer debt before investing. If your employer does not provide a 401(k) company match, you might be better to contributing to a Roth IRA to take advantage of the tax benefits later in life.
2. Buy inexpensive, well-diversified mutual funds such as Vanguard’s Target 20xx funds.
I have been a strong proponent of index funds, but I haven’t been a big fan of the target date funds — be they Vanguard or otherwise. The fees on the funds and the limitations on the investing options in these funds (in my opinion) is lacking a bit. For instance, these Target funds lack any REIT (Real Estate Investment Trust) options, except those REITs which are included in the stock index funds. These funds do have their place though. If you are really, really hand-off, these wrapper funds will take care of everything for you; during the year, they periodically tweak your investments to bring your asset allocation back to their appropriate levels. These funds will also minimize your investments in stocks as you age. Some people think this is appropriate, but I would rather maintain more of my money in the stock market. Warren Buffet suggests that you keep 90% of your investments in stocks. Vanguard agrees for young investors, but decreases the stock portion of your investments periodically, eventually decreasing the stock portion of your investments down to just 30%. There are plenty of people who will agree with this allocation. but I would rather continue to have a greater portion of my cash in the stock market than in the bond market.
3. Never buy or sell an individual security. The person on the other side of the table knows more than you do about that stuff.
For myself, I can’t say that this is appropriate for everyone, however, it probably is appropriate for most people. The vast majority of people lack the skills, the interest, or the time to closely monitor their investments. I will agree that owning individual stocks is riskier than owning a basket of stocks via a mutual fund investment, but if you do have the skills and the time, you may be able to outperform the stock market. But again, most people are likely better off just tracking the market’s performance rather than trying to beat it.
4. Save 20% of your money.
I couldn’t agree with this more. Do everything that you can to invest for your future. The more money that you are able to save, especially when you are young, the better off your retirement years are likely to be. Save as much as you can; pay yourself first. Aim for 20% of your gross wages. A fair portion of that can be in the form of a 401(k) investment; that type of investment is essentially invisible to you as the money is taken directly from your paycheck; you never see it.
To me, these are the primary aspects from Professor Pollack’s list. The remaining items, are either secondary or redundant. In short, invest as much as you can, and start as early as you can. Here’s the rest of the list:
5. Pay your credit-card balance in full every month.
As I mentioned above, this is paramount; if you have credit-card debt, make a plan to pay that off as quickly as possible.
6. Maximize tax-advantaged savings vehicles like Roth, SEP and 529 accounts.
Tax-advantaged investing options are certainly worth investigating. Imagine having your money grow for decades and never have to pay tax on the gains; that’s what you get with a ROTH.
7. Pay attention to fees. Avoid actively managed funds.
Fees can erode your gains; the typical fees on index funds ore about 7 to 10 basis points – that’s 0.7%, Pretty much minuscule. Fees on actively managed funds can exceed 1% annually; the difference can really add up over time.
8. Make your financial advisor commit to a fiduciary standard.
Unfortunately, it’s not all that unusual to hear stories about less-than-upstanding financial advisors. From USNews:
When shopping for financial advice, American consumers face a head-spinning array of choices. Among the options are large, brand-name brokers or banks, which run national commercials and have branches throughout the country. There are also local businesses of varying sizes. Some have dozens of employees, while others are one- or two-person shops. Other sources of financial advice include community banks and credit unions and local branches of smaller brokerages.
Then there are the growing ranks of robo-advisors, Web-based firms that use algorithms to construct asset-allocated, passive investment strategies for clients. But often, clients are unaware of significant regulatory distinctions throughout the advisory industry. One of the biggest involves the difference between the “fiduciary” and “suitability” standards. In a nutshell, fiduciaries are legally bound to hold clients’ interests first, and make all investment decisions on that basis.
The suitability standard, meanwhile, offers legal protections to clients but is less stringent. It requires a broker’s representative to put his or her clients in investments that are suitable for their objectives, resources, risk tolerance or age. Under suitability, a financial advisor considering two nearly identical funds for a client may sell the one with the highest commission without disclosing that to the client. A fiduciary, on the other hand, would be in violation of his or her duty by not disclosing all the facts.
9. Promote social insurance programs to help people when things go wrong.
I have mixed feelings about this one. I think I’ll leave this alone for now.