25 Rules to Grow Rich By
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Money Magazine has recently published a list of 25 things that they claim will make you rich. Although I think that this title is total fluff – stuff that catches a readers attention to get them to buy the magazine – as it covers things like never hiring a roofer who is going door-to-door. Sure that is an important in terms of ensuring you don’t get ripped off, it certainly won’t make you rich.
That being said, I went through the list and have highlighted the ones below that I think are important to investing and growing your investments assets.
1. All else being equal, the best place to invest is a 401(k). Once you’ve earned the full company match, max out a Roth IRA. Still have money to invest? Put more in your 401(k) or a traditional IRA.
The key thing about this “rule” is taking advantage of the company match. If your company offers, it then take advantage of it. It is like getting free money to invest. The other important thing about this “rule” is the focus on tax free growth – using programs that allow you to let your investments grow tax free.
2. Invest no more than 10% of your portfolio in your company stock – or any single company’s stock, for that matter.
Remember all those poor souls who worked at Enron who had whopping amounts of money in the company’s stock – where is that money now? Diversification is important and not being concentrated can help offset risk. However, there is a whole other mindset out there that says that investors should concentrate. I believe that this only works if you are very diligent about watching your investments. If you don’t, then diversify.
3. The most you should pay in annual fees for a mutual fund is 1% for a large-company stock fund, 1.3% for any other type of stock fund and 0.6% for a U.S. bond fund.
Keep your costs of investing low. If you are in Canada like me, then you are totally getting hosed on mutual fund fees. Buy only low cost index funds or mutual funds. Don’t believe the myth of you get what you pay for – it DOES NOT apply to mutual funds.
4. Aim to build a retirement nest egg that is 25 times the annual investment income you need.
Is 25 times the annual investment income you need the right answer? I don’t know. However, I believe it is extremely important to have a goal number that fits with your needs. The trick is figuring our what that number is.
5. If you don’t understand how an investment works, don’t buy it.
Enough said.
6. If you’re not saving 10% of your salary, you aren’t saving enough.
This is a pretty definitive statement, but the fact of the matter is that to retire with some sort of savings you need to be putting money away. The more you put away, the more you will have at the end (unless of course you don’t listen to #5 above).
Pretty good “rules” if you ask me.
7 Comments on this post
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Juston Garland said:
Great information but all this is easier said than done. Saving $25 a month is hard for a lot of families who are living paycheck to paycheck much less 10% or more as the article suggest. I think we need to teach and educate fellow Americans on websites like this one or through the school systems about saving, making money and building a good credit history.
October 19th, 2006 at 11:19 pm -
TJP said:
I think the #1 rule is by far the most important. diversification is the number one goal in an investment portfolio because there’s always a BULL market. I too like dividend paying stocks because on average they have retured 12% versus 11% on non-dividend stocks since the inception of the stock market. Nice post and keep it up.
October 20th, 2006 at 12:16 am -
mark said:
I read this article and was also stuck by how much of it was dumb fluff. You did a good job of seperating the wheat from the chaff.
To me, it’s the last rule (#6) that is most important. For a beginning investor, for years it will be the amount you save and put towards investing that will be more important than what you invest in.
If you’re a great stock picker – and can get a ten-bagger, well if you only had a few thousand dollars to invest, it won’t make that much of a difference.
But if you just save money month after month, year after year, and at least match the market’s returns, the returns will be much more impressive. (and if you get a ten bagger with several tens of thousands to invest; now we’re talking.)
I started investing about a couple of years before the bubble collapse in 2000-2002. Though I lost a good amount of money in percentage terms, I luckily wasn’t starting from a huge base of dollars. Just continuing to save and invest while the market was at a multi-year low, meant that I quickly made up for all my losses and got well into the black pretty quickly – even by investing in big ETFs like MDY.
Also great was that I got some big companies with decent growing dividends at multi-year lows which also led to nice compounded dividends five years later.
October 20th, 2006 at 10:16 am
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