Timeless Money Rules: Keys to Investing

Money magazine has a series on 20 timeless money rules that's pretty interesting. Over the next few days, I'll be sharing a few of these as well as my thoughts on them. The first one for today is to take calculated risks. Their thinking on this issue:

To earn returns high enough to build true wealth, you have to put some of your money in risky assets like stocks--the only investment to handily beat inflation over time.

I've got this one covered. As you know, I'm a big believer in long-term stock investing. I'm on the aggressive side, with about 90% of my portfolio in stocks. But I have a long time horizon (20 years or more), so I'm comfortable with such a high mix of "risky" investments.

A few tips later, Money says that a key to investing success is to diversify your investment types:

Nothing can break the law of risk and reward, but a diversified portfolio can bend it. When you spread your money properly among different asset types, a rise in some will offset a fall in others, muting your overall risk without a commensurate drop in return.

I spread my money among many different stocks -- that's a key advantage of index funds -- but not really among asset types. I do have some money in real estate (my house, of course, as well as a small amount in a real estate LLC), but little in bonds and none in commodities.

Next, Money again notes that asset allocation is key to investing success. They comment:

What really matters to your long-term returns is asset allocation--that is, how you split up your portfolio.

Since researchers dropped this bombshell 20 years ago, experts have debated the size of the asset-allocation factor. Some say it accounts for 40% of the variation in investors' returns; others (like the original researchers) say 90%. But no one refutes that it's major.

They then note how different people can have different asset allocations based on their tolerance for risk. I guess my tolerance is just high, since I'm so invested in stocks.

And we end today with Money singing the praises of index funds. They start by including a quote from Warren Buffet:

The best way to own common stocks is through an index fund.

;-)

They go on to tell why index funds are so successful and end with this:

It's hard to argue with the math, and history bears it out. Besides, if the Greatest Investor of Our Time believes that index funds are superior for most investors, shouldn't you?

I've covered all of these issues in past pieces, so they may be a bit old hat for some readers. But just in case you want more, here are some pieces to check out:

• How to Balance Risk and Return in Your Portfolio Asset Allocation

• Why You Need Some Investments in Foreign Markets

• Why I Like Index Funds

Comments

[justin]

I think by asset types they mean domestic and international, small and large, and probably REITs.

[Brian]

I believe Warren Buffet meant that the best way for a novice investor to own funds is through an index fund. Sounds great to me, though, as I would rather focus on making more money to invest instead of working my butt off to squeak out an extra 1 or 2% return.

Great post.

[The Dividend Guy]

I saw this article as well and appreciate hearing you comments on it. One thing that really frustrates me about these magazine is that it seems like they just regurgitate the same stuff over and over again. Perhaps this is what the majority of the investing magazine market wants to see?

This is the very reason that I enjoy personal finance blogs such as yours. The value added by your commentary is much more valuable than the article alone.

Thanks again for your efforts,

Jeremy

[Matt]

If you are limiting your asset classes to stocks and bonds you are doing yourself a disservice.