16 investment & retirement rules everyone should understand


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A “rule of thumb” is a mental shortcut. It’s a heuristic. It’s not always true, but it’s usually true. It saves you time and brainpower. Rather than re-inventing the wheel for every money problem you face, personal finance rules of thumb let you apply wisdom from the past to reach quick solutions.

Basic investing, in my opinion, is a ‘must know’ for future financial success. The following rules of thumb will help you dip your toe in those waters.

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1. Index funds or individual stocks?

Don’t handpick stocks. Choose index funds instead. Very simple, very effective.

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2. Don’t try to compete with the big boys

People who invest full-time are smarter (at stocks) than you. You can’t beat them.

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3. Keep this tried-and-true rule in mind

The Rule of 72 (it’s doctor-approved). An investment annual growth rate multiplied by its doubling time equals (roughly) 72. A 4% investment will double in 18 years (4*18 = 72). A 12% investment will double in 6 years (12*6 = 72).

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4. Skip emotional investment decisions

“Don’t do something, just sit there.” -Jack Bogle, on how bad it is to worry about your investments and act on those emotions.

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5. Get the employer match.

If your employer has a retirement program (e.g. 401(k), pension), make sure you get all the free money you can.

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6. Balance pre-tax and post-tax investments.

It’s hard to know what tax rates will be like when you retire, so balancing between pre-tax and post-tax investing now will also keep your tax bill balanced later.

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7. Keep costs low.

Investing fees and expense ratios can eat up your profits. So keep those fees as low as possible.

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8. Don’t touch your retirement money.

It can be tempting to dip into long-term savings for an important current need. But fight that urge. You’ll thank yourself later.

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9. Rebalancing should be part of your investing plan.

Portfolios that start diversified can become concentrated so one asset does well and others do poorly. Rebalancing helps you rest your diversification and low er your risk.

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10. The 4% Rule for retirement.

Save enough money for retirement so that your first year of expenses equals 4% (or less) of your total nest egg.

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11. Put yourself first

Save for your retirement first, your kids’ college second. Retirees don’t get scholarships.

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12. Keep your eye on the future

$1 invested in stocks today = $10 in 30 years.

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13. Don’t overlook inflation

Inflation is about 3% per year. If you want to be conservative, use 3.5% in your money math.

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14. And consider average earnings

Stocks earn 7% per year, after adjusting for inflation.

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15. Own your age in bonds

Or, own 120 minus your age in bonds. The heuristic used to be that a 30-year old should have a portfolio that’s 30% bonds, 40-year old 40% bonds, etc. More recently, the “120 minus your age” rule has become more prevalent. 30-year old should own 10% bonds, 40-year old 20% bonds, etc.

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16. Don’t invest in the unknown.

Or as Warren Buffett suggests, “Invest in what you know.”

Want more investing tips? You’ll find everything from how to handle budgeting to overcoming the mental side of money here.


This article originally appeared on The Best Interest and was syndicated by MediaFeed.org.

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