If you’re under 30, and you’re ready to start putting money towards retirement, you should be very proud of yourself. If not, well, it’s never too late to get started, but these rules may not directly apply to you.
Investing is a skill, and when you’re learning new skills mistakes are commonly made. I was very young and naive when I first started investing, and I made catastrophic mistakes (you can read about them here). I took on too much risk, did not properly diversify, and invested in assets I didn’t understand. I lost most of my retirement funds by not following those 3 simple rules. On the bright side, this happened to me at a very young age so I have plenty of time to make a solid recovery.
I am very stubborn by nature and I usually learn things the hard way. But you don’t have to! These 9 rules will help keep you out of trouble and build a healthy investment portfolio:
1. Start young
The key to building a successful retirement is to start early. A $10,000 investment at 11% for 10 years is $167,220, while the same amount invested for 40 years is roughly $5,818,261 – nearly 35x as much money. That’s the “magic†of compounding returns.
2. Don’t be afraid to take risk
This doesn’t mean you should go out and buy speculative stocks on margin. NO! This means that you’ll want to have the majority of your money in high growth stocks, rather than bonds or cash.
A good rule of thumb is to subtract your age from 100 and allocate that % of your portfolio to stocks. If you’re 30 years old, then you would want to allocate 70% of your money in stocks.
3. You’re in this for the long term
You don’t need to check your investments every day. The markets are going to move up and down. Try to remember that you’re in this for the long term.
4. Take advantage of your companies 401k match
If your company offers a 401k match, take advantage of it! I would advise you to contribute as much as the company will match. My employer offers a 6% match, so I contribute 6%, for a total investment of 12% per paycheck. You don’t pay any taxes on the money you contribute, or any taxes on the gains you receive, allowing for years and years of tax free compound.
5. Don’t put all of your money in your employers stock
This is an important one! What happens if you have all of your money is your employers stock and then the company goes under? Now you’re unemployed and you’ve lost all of your assets. That’s a huge disaster! Don’t think it can’t happen to you? It happened to me!
6. Start a side business
Starting up your own business can be risky but rewarding. Why not try to turn a hobby or passion into a side business? If it works out it could be one of the best things that ever happened to you!
7. If You Don’t Understand It, Don’t Invest In It
There seems to be an illusion that you need to invest in complicated assets to be a winner, as if it gives you some sort of edge. It’s just the opposite. Investing in companies you understand simply leads to more winning trades.
Good compilation Steve! Give some unique perspective as well, such as what you did right or wrong when you were at this age.