Four Rules of Finance

Thursday, May 6, 2010  //  0 Comments  //  News

One of the biggest (if not the biggest) determinants of how well your investment portfolio does is how you divide your assets into various investment vehicles. What percentage do you need in cash, stocks, bonds, real estate, and so on? It’s a difficult question to answer for many. But in this piece, the Motley Fool tries to simplify the process into four rules for asset allocation. They are:

Rule No. 1: If you need the money in the next year, it should be in an interest-bearing savings or money market account.

Rule No. 2: If you need the money in the next one to five (or even seven) years, choose safe, income-producing investments such as Treasuries, certificates of deposit (CDs), or bonds.

Rule No. 3: Any money you don’t need for more than seven years is a candidate for the stock market.

Rule No. 4: Always own stocks. Even if you’re at or near retirement age, stocks can help your portfolio beat the debilitating effects of inflation.

My thoughts:

1. For short-term stashing of cash, I recommend Emigrant Direct.

2. I don’t have much (if any) money that I need in the 5-7 year time frame, so I don’t invest in bonds, CDs, etc.

3. My investments are long-term, and thus they are built on stocks, much of which is in index mutual funds. Here’s more about index fund investing and why I like it so much:

• Getting Rich is Simpler than You Think
• Fund Indexers, Take (Another) Bow
• Expenses, Taxes and Size Matter in Choosing Bond Funds (And Stocks too!)
• Where the Pros Stash Their Own Dough
• The Case for Indexing
• Investment Advice from Someone Who Manages Billions

4. I plan to keep as much money in stocks as possible for as long as possible, then when I know I’ll be needing it in a few years, I’ll move it down the ladder into bonds and ultimately into cash accounts.

Source: http://www.freemoneyfinance.com/2006/01/4_rules_for_ass.html