Last week, I started looking at the top 25 money tips of all time, according to MoneySense, a Canadian finance magazine. I looked at tips 1 through 5, 5 through 10, and 11 through 15 so far, and there have been some interesting thoughts. Some are aligned with mainstream views while others might surprise you. Here are tips 16 through 20.
Be cheap. The financial advisors intereviewed are concerned that paying 2% for investing advice every year cuts into your profits. According to their calculations, you lose a third of your investment to fees after paying this percentage for 20 years. This stresses the importance of choosing mutual funds with low expense ratios. Vanguard offers mutual funds with very low management fees. My mutual funds come from TIAA-CREF, which also offers low fees at the current moment.
Forget last year. While you’re shopping around for mutual funds, don’t be swayed by a fund’s recent performance. “Top performers in one period often lag behind in the next,” according to MoneySense. When salesman try to sell you a fund, they’ll try to sell you something that has performed well recently, but that isn’t always the best choice. The magazine suggests looking for consistency in performance year after year, but that’s not a surefire way to make millions of dollars, either.
Ignore your portfolio — selectively. “Smart investors avoid looking at their portfolios too frequently.” Most of the time, you’re investing for the long term. Daily fluctuations don’t matter much when your time horizon is several decades. If you watch your accounts every day, you may let your emotions take hold and react poorly. The magazine doesn’t say precisely what it means with the “selectively” qualifier, but in my interpretation, you should be watching your accounts for larger-scale patterns. That will allow you to get out of really bad investments or into exceptional opportunities.
Keep it simple. Investing doesn’t have to be complicated. You can instantly create a well-diversified portfolio by looking into one of Vanguard’s Life Cycle Funds, some of which target a particular date for retirement, and adjust the asset allocation automatically. With one fund, you have instant diversification. There’s really no point in delaying investing because you believe it’s too difficult; the longer you wait, the more you’re missing out on compounding returns. Start out with one fund like a Target Retirement fund and as you educate yourself, add what you need in order to diversify further.
Look for the right fit. When searching for a financial advisor, the magazine suggests asking the potential expert what type of clients they prefer to work with. If their description doesn’t match you, then move on. I would go with someone who charges a flat fee rather than a percentage of assets (more about this next time), but I agree with the magazine. For example, if the advisor has only experience with high net worth clients, he or she may attempt to provide products or services not within my price range.
Only five tips remain from the “top 25 money tips of all time.” I’ll take a look at the remaining ones in a following blog entry today or tomorrow.
Updated February 6, 2012 and originally published July 10, 2006.