We discuss ten rules of thumb for individual investors to consider when saving and investing for and in retirement.
Here are the ten rules of thumb:
- Don’t use institutional hand-me-downs
- Stay close to home base
- Beware of dragon risk
- Mind your investment seasons
- Catch the popping corn
- Watch for market swarms
- Track the economic winds
- Follow the traffic lights
- Diversify your baskets
- Don’t burn your ships
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Welcome to Money for the Rest of Us. This is a personal finance show on money, how it works, how to invest it, and how to live without worrying about it. I’m your host, David Stein. Today is episode 454. It’s titled How to Invest Money: 10 Investing Rules of Thumb.
In early 2012, right before I was going to leave my investment advisory firm, I spent a couple of weeks in Southern Mexico, in the Yucatan. I went by myself, and I spent the time taking photographs, writing, thinking. One of the things I was really focused on—putting down my investment philosophy, as it would apply to individuals.
I had spent almost 15 years managing money for institutions, university endowments, private foundations, as well as managing the assets for individual investors, the assets of financial advisors. I hadn’t thought much about this writing—it eventually became an eBook—until this past week.
And it turns out, I’ve touched on some of these principles in the podcast; I certainly discussed them some in my book, Money for the Rest of Us: 10 Questions to Master Successful Investing, but they are somewhat different. I thought it would be helpful to share these investing rules of thumb and expound on them a little bit and what might have changed in the past decade. Because things do change, markets evolve, economies evolve.
Tulum, where I spent a week on the beach a decade ago, in 2012, I spent about just under $200 a night for a little cabana on the beach; beautiful, beautiful beach. It was difficult to get to Tulum at that time. I rented a car, but you had to drive an hour or so from Cancun. Now, apparently, Delta has a direct flight to Tulum. And that same hotel, or cabana, where I spent less than $200 a night, last time we checked, they wanted over $1,500 a night per room. And we don’t stay there anymore; it’s just not worth it. So things evolve.
Don’t Use Institutional Hand-me-downs
Here’s investment rule number one: stop using institutional hand-me-downs. When I was growing up, I got a lot of hand-me-down clothes from my cousins. Some I loved. I had a killer pair of red bell-bottom pants that I loved to wear. But others I just sort of hid away in the drawer.
As individual investors, we also inherit hand-me-downs. Not hand-me-down clothes, but tools and language that institutional investors such as pension plans and college endowments use to manage their portfolios. They include complicated-sounding tools such as strategic asset allocation, Monte Carlo simulation, market benchmarks. Some of the tools can be helpful, but we need to remember that we’re individual investors, we’re not pension plans, so we don’t have to invest like them, nor do we have to use the same tools that they use.
Because there’s a main difference between us and an institution, a college endowment. We die. Institutions don’t. Or usually don’t. The investment time horizon for an institutional investor is significantly longer than that of individuals. Most institutions invest for perpetuity. And given their longer time horizon, institutions can afford to make mistakes, because there’s ample time to recover from them. But as individuals, we don’t get second chances. Institutions do.
If an institution such as a pension plan or college endowment suffers devastating portfolio losses, they can go to their corporate sponsors, or their fundraising arm, to get more funds. But as individuals, if we’re approaching retirement, we don’t have that luxury.
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