Today I Learn… I make a point of learning something new everyday. This is what I learn each day

1, May 5, 2014

Building wealth, according to money magazine

Filed under: Money — admin @ 12:38 am

I spent some time on May 2014 issue of Money magazine during the first weekend after I got back from China. The cover story of this issue is “101 ways to build wealth.” So many ways! Of course, I was intrigued to find out what they are. After flipping through them, I have picked a few of them which might be helpful.

The article treats wealth building as a series of projects taken over the period of one’s life:
Project 1: lay a base
Project 2: expand
Project 3: refine
Project 4: reconstruct

Tip 1: Don’t sweat the investment at first–saving trumps savvy. Investment choices don’t matter much initially. “about 20% of your true total wealth, including future pay, is likely to be in financial assets at age 35. So even if you lose 30% in your 401k, that is an overall hit of less than 7%. You can recover. Get started, and give yourself a year or two to learn to be an investor.

Tip 2: Spend less to enjoy more. Focus on using your dollars in the way most likely to make you happy. When you buy a luxurious coffeemaker–“you are more likely to feel buyer’s remorse when you go high-end. One reason: you will soon feel annoyed by the effort required to learn to use the extra bells and whistles.

Tip 3: when you are young, go Roth IRA

Tip 9: Ignore this one habit of the young and the rich: the most active traders earned 7% less per year than the ones who tended to stand pat.

Tip 12-14: build around three cheap funds: 40% on U.S. stock market index fund; 40% on bond market index fund; 20% on foreign stock index fund.

Tip 15: invest in a team, not a star. Stick with stellar funds run by a disciplined committees, not a single manager.

Tip 16: Get more by doing less. By trying to outsmart the market, overly active investor usually dig themselves into a hole.

Tip 17: Do something by “doing nothing.” Tossing in an option is called “Doing nothing.” “This small addition to your set of choices will subtly remind you of your goal and help you stay disciplined.”

Tip 18: Investing with your head, not your heart. Don’t make any financial decisions with a forlon heart. When feeling lonely or socially isolated, you are more apt to take bigger risks with your money. So delay important financial decisions following a breakup or a falling-out with friends or family.

Tip 22: protect your portfolio like Buffett: build moat. “determining the competitive advantage of any given company and, above all, the durability of that advantage,” said Buffett. Wide moat describes firms with products, services, or business models that can stand the test of time.

Tip 27: diversify your tax exposure. Everyone should put some money in a Roth IRA. With a Roth, you take the tax hit up front but get to pull money out tax-free at retirement.

Tip 28: cash is a poor choice for a long-term investment.

Tip 32: put your adviser under a bright-scope.” You need to know more than just their fees and disciplinary record. Check brightscope.com

Tip 33: pay next to nothing for basic help. Don’t overpay. Check some internet based advisers.

Tip 34: learn the ABCs of 529s to save for education

Tip 37: build in safeguards. Want an investment that will keep you safe in times of trouble? Seek out funds that over the past decade have lost less than the broad market in months when stocks have tumbled, while still outperforming over the past 10 years.

Tip 48: buy the smallest house in the best neighborhood you can afford.

Tip 50: fight tomorrow’s war today. Safeguard your cash with I bonds, government bonds.

Tip 51: defend your bonds with TIPS–Treasury Inflation-Protected Securities. VIPSX

Tip 53: forget the usual hedges. Investors have traditionally turned to hard assets such as real estate and commodities to guard against inflation. History shows these tools are barely as effective as cash.

Tip 54: utilize the best retirement plan you’ve never heard of. Use HSA, health saving account, where money grows tax-sheltered, and withdrawals for medical expenses are tax-free.

Tip 57: automating your payments use makes life easier, but study shows that nothing promotes saving more than paying the old-fashioned way. Very often you are not aware of how much you have overspent with automatic payment arrangement.

Tip 58-59: bring some joy back to investing. Let loose by taking a flier on these stocks with some play money–Linkedin, skyworks, etc.

Tip 61: go for McSaving, not McMansion. Amount you’d save by buying a $300k instead of $375k house is $162k, if you put $75k down and take out a 30-year 4.4% mortgage. Squeeze out as much savings as possible by purchasing a modest property at the lower end of your range, instead of buying the maximum that you can afford.

Tip 62: grab a second paycheck by earning rental income. Own a second house for renting.

Tip 66-68: use funds to tap high tax-exempt municipal bonds, 2% for intermediate-maturity issues vs. an after-tax equivalent of about 1.5% for regular bonds. For short-term money, use Vanguard Limited Term (VMLTX), Vanguard Intermediate Term Tax Exempt (VMITX), iShares National AMT-Free Muni Bonds (MUB).

Tip 71: avoid parental bailouts: your kids’ college debt shouldn’t exceed a year of post-grad pay.

Tip 74: diversity for income: 32% for US high-quality bonds, such as Vanguard Total Bond Fund; 18% international and high-yield bonds, such as Vanguard Total International Bond; 25% large US companies with dividends; 10% international stocks with dividends…

Tip 77: make sure you have this hedge: one reason to own foreign stocks is that currency fluctuations can boost returns and add to diversification.

Tip 80: if you have enough in your IRA to leave to the next generation, but worry junior will cash it out, set up a trusteed IRA.

Tip 81: stretch those legs–and stretch your dollars. The healthier you are, the less of your nest egg you will need to spend as chronic disease can be costly.

Tip 82: if you are not qualified for Roth IRA, make a contribution to a non-deductible IRA, then immediately covert to a Roth.

Tip 85: put your portfolio in buckets, that is, segment your nest egg based on when you need the money.

Tip 91: move to a smaller house and average school district when your children have left.

To be continued next day with the last tip.

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