When you condense a wealth of financial knowledge into 10 “rules,” you’re taking part in a process known as “simplification.” Perhaps not ironically, that happens to be Fortune Magazine’s third rule for building wealth.
Choosing three or four index funds – say, an S&P 500 fund, an EAFE fund, and a small-cap stock fund – will give you broad exposure.
Diversification in equities has proven to be the best way to achieve high returns in exchange for little risk over the long term. The combination suggested exposes investors to American companies of a variety of sizes as well as Europe, Australia and Far East (EAFE) companies.
The magazine also suggests lifestyle or target retirement funds. You may be able to mimic the philosophies of these funds on your own without having to pay the slightly higher fees that target retirement funds charge, but there is a theory that says one may forfeit small amounts to save oneself from headaches and stress. A family member is having me review her financial position; I will probably suggest she move funds invested in annuity products to a lifestyle fund that matches her plans for retirement. (At which point, I will remind her that I am not a professional.)
Published or updated December 13, 2006. If you enjoyed this article, subscribe to the RSS feed or receive daily emails. Follow @ConsumerismComm on Twitter and visit our Facebook page for more updates.