12 Rules for Financial Security


Question: My wife and I are in our early thirties and both work.  We feel as if we need some advice to help us plan our financial future.  We have no children now but plan to start a family soon.  What kinds of things should we be thinking about, and what obstacles should we be aware of? 

Answer: A Chinese proverb says: "He who asks a question is a fool for five minutes; he who does not ask a question remains a fool forever." You are wise to ask this question.  Here are my 12 rules for financial success.

1) Educate Yourself

Educate yourself. For starters, read “The Total Money Makeover, a Proven Plan for Financial Fitness" by Dave Ramsey. To learn more about investing, read “Winning the Loser’s Game” by Charles D. Ellis and “A Random Walk Down Wall Street” by Burton G. Malkiel.  To understand how markets really work – and don’t work – read Justin Fox’s “The Myth of the Rational Market: A History of Risk, Reward, and Delusion On Wall Street.” 

2) Pay Yourself First

Pay yourself first. Start saving early.  Compounding is like a money tree.  If a 35-year-old hypothetically tucks away $2,000 today and again every year until age 65 in a stock portfolio that averages 8% per year, he will have close to $250,000 at age 65.   If he waits ten years and starts at age 45, at 65 he will have less than $100,000.  Only $20,000 of the $150,000 shortfall comes from his pocket.  The other $130,000 represents missed compounded earnings.

3) Don't Try to Time the Market

Don’t think you can time the stock market.  You can’t.  You might guess correctly once in a while but not enough to pay off.

4) Don't Be a Stock Picker

Don’t think you can consistently pick superior stocks.  If that were possible, the thousands of financial analysts with masters and doctorate degrees who pick stocks for Wall Street firms would all stay home and live lavishly off their stock-picking ability.    At the very least, the firms they work for would consistently outperform the market.  That happens rarely, if ever.

5) Beware of Too Good To Be True Returns

Don’t believe the guy that tells you he makes lots of money trading stocks.  Like the gambler in Vegas, he will make money -- but he will lose it too. 

6) Diversify Investments

Diversify your investments.  Use mutual funds to own large companies, small companies, international companies, and emerging market companies.

7) Invest in Low-cost, Index-type Funds

Use low-cost, broad market index or index-type quantitative funds. Research repeatedly tells us most active mutual fund managers don’t beat the market

8) Don't Chase Returns

Don’t chase returns.  The hot fund, or hot stock, this month or this year will inevitably lose its luster.  Invest for the long-term. 

9) Stay Out of Debt

Stay out of debt.  Don’t buy what you can’t afford. Pay off your credit cards every month.  Mortgages are okay because you are using leverage to buy an asset that will increase in value over time.

10) Save for College

Save for college.  You can't go wrong by using a 529 college savings plan.  If your kids never need the money, you can take it back. 

11) Beware of Investment Salespeople

Beware of investment salespeople.  If you want advice, seek out and hire a competent advisor. Get referrals and check them out. Don’t be fooled by friendly smiles, unsolicited phone calls, free lunches, and fancy advertisements.  .

12) Buy Some Real Estate

Buy some real estate.  Start with your own home.

Kenneth B. Petersen CFP®, EA, MBA, AIFA® is an investment manager and Principal of Monterey Private Wealth, Inc., a Wealth Management Firm in Monterey.   He welcomes questions that you may have concerning investing, taxes, retirement, or estate planning.  Send your questions to: Ken Petersen, 2340 Garden Road Suite 202, Monterey, CA  93940 or email them to ken@montereypw.com.