My Ten Investment Rules

I’m not a wealth manager but I’ve learned a lot about investments during the course of my career. As on most financial topics, I’ve got some strong opinions and here are my Ten Investment Rules. Keep in mind they are just my opinion.

1—Invest in Yourself First

This is probably most relevant to younger readers but I believe that the best investment is always in oneself. This often takes the form of more education or acquiring another skill. This increases your earning power, makes you a better manager or maybe a better person.

2—Buy a Home

Despite the Great Recession, I still think that home ownership is the second best investment one can make. In markets like the Seattle area, homes will continue to appreciate. You can borrow cheaper against your home than anywhere else, providing leverage, and the tax benefits are extraordinary.

3–Invest in your Business

If you have your own business, usually the best return on investment you can make is in your business. It is true that this provides no diversification but it is still where you get your best return.

4—Minimize Borrowing to Finance Depreciating Assets

For most people that means buying a less expensive car than you can afford. Cars depreciate while real estate appreciates. Borrow to buy real estate but not cars. Yeah, I know, a nice car is a pleasure and I’m a real car guy so I might break this one myself.

5–Take a Long-term View

Investing needs a long-term perspective. Think in terms of years and decades and use that perspective to frame your planning.

6—Have a Diversified Portfolio

This is the cornerstone of any investment strategy. Modern portfolio theory teaches us that risk can be mitigated through a diversified portfolio. I suggest real estate and the stock market at the very least. Bonds, maybe. Precious metals and commodities? That’s speculation to me and doesn’t make sense in my mind. Collectibles? That’s a hobby, not an investment.

7—Take Advantage of Tax Deferred Plans

Tax deferred plans can increase your returns. For an employee, an employer match on a 401(k) plan is like giving yourself a raise. For the self-employed there are substantial advantages through a Simplified Employee Pension (SEP).

8—Buy Index Funds

Studies have shown that picking stocks, or paying someone to pick stocks for you, will result in lower returns than an investment in the broad market. An investment in the market can be had by purchasing an index fund with low fees. Picking stocks is a fool’s game but almost irresistible to many. Day trading is about as stupid as going to the casino.

9–Mitigate Risk in Creative Ways

Have insurance for risks you can’t afford. Create multiple income streams if you can. If you’re married, living within the salary of one spouse while both work is terrific.

10–Keep Some Liquidity

Have part of your portfolio in cash or near-cash at all times. The amount depends on your circumstances and tolerance for risk. Liquidity provides funds for emergencies and opportunities. It also helps you sleep at night. There are FDIC-insured savings accounts that provide 1.25% interest and are completely liquid.

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