Ben Stein’s latest book offers a different, destructive take on one’s personal finances. How to Ruin Your Financial Life contains over fifty popular ways people sabotage their financial lives.

With each lesson taking no more than a couple of minutes, the book is a quick read. It’s also a funny book; Ben’s trademarked dry humor abounds, reaching Saharan levels as he explains why and how you should ruin your financial life.

Each rule is designed to shock readers from their complacency. Although most of the rules might sound like bad ideas, Ben assures us that things will be different for us. So, you see, there really is no reason to be afraid.

Now while we might not spend as much as we want, bravely going into debt (rule 6) and we probably don’t believe that we are not responsible for our financial well-being (rule 16), we still might be making a few of the mistakes described.

If you do see a little of yourself in this book, changing your financial habits should be a little easier after reading about the company you keep.

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Have you heard that advertising campaign about people almost helping their neighbors? It’s a powerful message. Sometimes we think about doing good, but we fail to follow through.

The thought is either pushed aside or we fool ourselves into thinking that it’s the thought that counts. We’ll just do that later.

With investing, like doing good, the thought or intention is not good enough. We can intend to start saving for retirement all we want, but our problem is only going to grow bigger and bigger. It will continue to grow until we actually come up with an investing plan and a written game plan (budget) for setting aside money for our future.

I could list statistics and facts like the amount we must save doubles for every decade we delay, but statistics won’t change most people’s minds. Just as we have to want to do good, we have to want to be responsible in order to be financially successful.

Do you have any plans, dreams, or good intentions lying around gathering dust? Today could be the day to make the leap, plunge, or effort. No one is stopping you, but yourself.

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Q: I’ve invested in my 401k for 11 years now and have experienced many ups and downs, but I didn’t do much research when I started. What’s the best way to invest for retirement?

A: You’re right to step back and start anew with a more methodical, researched approach. I’d recommend you read a good investing book or two like The Coffeehouse Investor, which is both quick and easy to read.

While you won’t be able to avoid the stock market’s downs without also missing out on the gains, you can set yourself up to see more of the latter.

Diversifying your investments will protect you from the steep declines that come with investing too heavily in a specific stock, industry, or type of asset. Your asset allocation should also take into consideration your tolerance for risk.

Understanding your risk tolerance is essential. Overly aggressive investors have lost millions and nest eggs have been shattered by risky investments. Historically, more stock market risk has translated into higher returns, but only when the stocks are held long enough.

Investors who panicked after a bad day, year, or even decade lost money. Holding your age in bonds is one way to control your exposure to stock market risk. For example, a fifty year old investor’s nest egg would be split evenly between stocks and bonds.

And while stocks return more than bonds, their prices fluctuate more wildly which can be disastrous if you are near retirement. To learn more about your comfort with and need for risk, check out William Bernstein’s The Four Pillars of Investing & Larry Swedroe’s Wise Investing Made Simple.

Investing through index funds is the final key to successfully investing in your 401k. Index funds are a basket of stocks that fulfill a specific criteria. For example, the S&P 500 includes the 500 largest American companies based on their market capitalization (the total value of their outstanding stock).

Index funds are the foundation of a successful investment strategy because investment brokers, mutual fund managers, and day traders are not consistently successful. More than 80% of mutual fund managers fail to beat their respective indices.

So the odds that one of your 401k options is a market-beater is very unlikely. And even if one was, how would you even know beforehand?

These three considerations–diversification, reasonable risks, & index funds–will start you towards a secure retirement. To learn more on investing, saving enough, and minimizing investment expenses, read the aforementioned books or subscribe to On Financial Success for free.

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Have you ever wondered how to get rich investing in the stock market?

Would you like to know how the most successful investors made their fortunes?

Are you confident you can accomplish anything you set your mind to?

If you answered yes to all of these questions, relax, you’re normal.

Unfortunately, you’re also probably on the path to financial disaster—low investment returns. Very few investors beat the market year after year.

Larry Swedroe’s latest book Wise Investing Made Simple cuts through investment propaganda with a strategy that offers you “the greatest odds of achieving your financial goals with the least amount of risk.”

Larry has made a career on solid investment advice through six books and his experience as an investment advisor. Now director of research for Buckingham Family of Financial Services, he continues to promote solid investing principles in his new book.

Wise Investing Made Simple uses tales to show how common sense often does not translate into financial sense. The stories address questions like why it’s not possible to consistently pick winning stocks and why great companies do not make high return investments.

If you are already familiar with the advantages of index funds, low expenses, and asset allocation, you’ll find enjoyable stories that reinforce what you know.

But if you are new to investing, you’ll learn why most investing advice is wrong—the advice hinges on the premise that you or professional investors can successfully pick rising stocks. Consistently beating the market, however, is nearly impossible, even for the most successful professional investors.

Wise Investing Made Simple will also explain why the most successful mutual funds aren’t likely to provide you similarly high returns.

If you are a do-it-yourself investor, you will probably need to read more on index funds and asset allocation before setting out on your own. Otherwise, this book will put you on the right investment path and will help you find a reputable investment advisor that can design the plan most likely to achieve your financial goals.

You can learn more about Larry Swedroe, wise investing, and his books at Buckingham Family of Financial Services. Make sure to check out his monthly column at Moolanomy.

Many thanks to JLP @ All Financial Matters who provided the book via a drawing.

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Last time we talked about stock ownership and how it’s different from gambling, but that risk still remains.

In particular, the risk that your companies may go out of business, leaving you with stock worth little more than used lotto tickets.

This is a very real risk. Fortunately there is a reasonably safe solution. But first, lets push away—once and for all—the dream that you will find the next Microsoft by investing in individual stocks.

Prepare to be disabused

Picking a big winner is highly unlikely. Even the experts have trouble selecting future big earners, at least without also selecting plenty of big losers as well.

Not only do you need to find the right businesses, but you must find them at the right time as well—a near impossible task for the individual investor at home.

You also need to know the best time to sell a winner, so you can buy the next fast grower at the right price. Company growth and stock growth slows over time, so one would need to be extremely flexible, and right. All of the time.

Finally, hidden minefields must be avoided. Stock owners always face the small, but real risk of losing everything when a company suddenly goes bankrupt.

Sound easy? Fortunately, there is an easier way to own successful stocks.

A safer, more reliable way to own stocks

So how does the average investor avoid these pitfalls, while still enjoying any upturns in the stock market? Index funds. Index funds allow investors to own hundreds of stocks, spreading their risk across the entire market.

In fact, a mutual funds’ success can only be measured by comparing it to the relevant stock market index. While some funds manage to beat their indices, few do so consistently. (Indices is simply a fancy financial term for “indexes.”)

Simply investing in an index fund will allow you to beat up to 85% of the actively managed funds out there.

This is possible because:

• Index funds have fewer transaction costs (constantly buying and selling incurs a lot of stock trading fees). Lowered transaction costs translate into lower expense ratios for investors, leaving thousands of dollars where they belong—with you.
• Index funds protect you from incorrectly timing the market. Many of the biggest stock market gains are limited to a short period of time. If you aren’t invested or if you own the wrong stocks you would miss out on huge gains.
• Index funds are protected from management risk. Some managers beat their relevant indices, some of the time. However, there is a risk that they will retire, make a big mistake, or some other surprise will affect your return. With an index fund, you always know where your money is invested.

To learn more about investing with index funds, check out the reliable but accessible book: The Bogleheads’ Guide to Investing (sample chapter available).

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When I hear this question, occasionally I am tempted to respond ‘what is gambling’?

This isn’t just a flippant response—it is that—but it is also useful for clarification.

One definition of gambling is the attempt to win against overwhelming odds, essentially hoping that you’ll receive an over-sized pay-out.

Of course, gambling comes in a variety of forms from the impossible-to-win lotto to a night of poker with friends where you might just be the best player who will consistently win.

In a similar way, one can choose to gamble in the stock market (angling for oversized returns) or to make logical investments that will most likely pay off over time.

Many factors affect one’s ability to make money in the stock market (purchase price, dividends, etc) but the fundamental difference remains—stock is concrete ownership in a public company. While a purchased lotto ticket will soon become worthless and a night of poker can go horribly wrong despite your skill, purchased stock will retain some value as long as the company remains in business.

What about the risk of the company going out of business? Tomorrow we’ll answer that question and discuss one possible solution—index funds.

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Every year, investors miss out on millions of dollars that could have remained theirs.

These millions are taken from big and small investors alike, but the investors all have one thing in common—they invested their hard earned funds in high cost mutual funds.

Some people (brokers and mutual funds mostly) will claim that higher costs translate into greater returns, but the evidence does not back them up.

Death by a thousand cuts

At first glance, investment fees of 1-2% might not sound like much, but their impact grows with time. Investing is a long-term endeavor and the power of compounding interest is huge. Consider two $100,000 investments made in different mutual funds, one charging a 0.5% expense ratio and the other 1.5%. Both funds receive the same 8% return.

At the end of twenty-five years, the lower-cost fund would contain $609,000. The more expensive fund would lag by $127,000. This money is gone forever and only adds to the fund’s profits. The gap grows to a more astonishing $562,000 at the end of forty years.

Why you need to invest your time too

As with most arrangements in life, investment companies are not legally obligated to have your best interest in mind. This conflict of interest is why you need to invest time understanding how investing works.

This time investment is crucial if you find yourself having to scrimp and save to come up with money to invest. Make sure the rewards from your labor and thrift stay with you.

You can find low cost mutual funds at Vanguard, Fidelity, TIAA-CREF, & others.

For more information on increasing lowering costs and increasing your returns, check out the Four Steps to Financial Success ePamphlet.

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Like all new year’s resolutions, the sooner we change, the more we benefit. And much like our health, the consequences of poor financial decisions can take years to appear. Fortunately, it is possible to restore our financial health later in life.

Just like exercise, but different

But just like exercise, the longer you delay saving, the harder you have to work to restore your financial health. So unless you have access to a trust fund or have earned a generous pension, you will need hundreds of thousands invested (a nest egg) to generate income for you when you are no longer able or no longer want to work.

There are two ways your nest egg can grow: contributions and investment returns. Thanks to the power of compounding interest, early, consistent contributions can grow to hundreds of thousands of dollars during your lifetime. If you’re young, start now because you will need to invest twice as much for every decade you delay.

If you’re not so young, start now. Further delay will only make the situation worse. Thankfully, this is not your health we’re talking about. You can turn this ship around if you to want to badly enough.

Smart strategies for a late start

When time is not on your side, you have three options. (1) You can work longer than you intended to make up for a smaller nest egg, (2) or you can make bigger contributions. (3) Some people even take on more risk in hopes of making up for lost time.

This is not a good idea.

Riskier investments, late in life is akin to going “all in” at a casino, hoping your luck has changed. This strategy will work for some investors thanks to dumb luck, but the vast majority will find themselves worse off than before.

If you have a large income, the solution will be simple—but not painless. Bigger contributions might require you to downsize your lifestyle, but you by no means will have to be frugal.

If your income isn’t quite as large, then you’ll need to cut some unnecessary expenses, earn more, or both.

So when is it too late?

What is the lesson here? Is it too late to begin saving? No—like all positive changes, the sooner made, the better off you’ll be. Begin saving today (or paying down debt) because even a modest nest egg will have a profound impact in your golden years.

Here’s four steps to get you back on track:

1. Start now with a written plan outlining your future needs and aggressively eliminate any debts
2. Contribute as much as you can by following a written budget
3. Invest responsibly with low-cost index mutual funds and a plan for allocating your investments
4. Don’t rule out valid options like downsizing your goals, working longer, or finding a career you can enjoy part-time during retirement

You might also want to checkout Four Steps to Financial Success, a pamphlet on four key steps to achieving financial success. Also, make sure to subscribe to On Financial Success to learn how to grow and protect your wealth.

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If we can’t beat the market, what’s left? Well, we can cross our fingers, selecting individual stocks and fund managers in hopes that we’re making the right decision.

Or we can approximate the market’s returns by owning everything. There are several benefits to this approach:

• You’ll beat approximately 85% of managed funds
• When the market goes up, you will know for sure that your investments are going up too
• You’ll be insulated from spectacular Enron-like bankruptcies

So, how does one go about owning everything?

 
Low-cost index mutual funds.

They match the market’s return, minus small annual fees (the expense ratio).

They beat the majority of actively managed funds every year.

They beat an even higher percentage of actively managed funds if you consider consecutive years.

They don’t change—you don’t have to worry about a new manager changing the way the fund invests.

They are more efficient because there are far fewer transaction costs from the manager’s trades into and out of stocks.

So owning a little of every stock will be enough to ensure success?

Hardly. Stocks are still risky, especially over the short term. Diversifying will bring a level of stability to your nest egg that would be impossible if you only invested in a handful of places.

There are four main types of diversification:

1. Holding index funds instead of individual stocks
2. Investing in multiple industries instead of a single sector (owning different types of companies instead of owning, say just internet-based companies)
3. Investing in foreign stock markets instead of only owning your nation’s stocks
4. Investing in a combination of stocks, bonds, and cash instead of putting all of your money into one type of asset

While everyone should diversify, your personal tolerance for risk will help you decide on the exact percentages of stocks, bonds, and cash. A good, common rule of thumb is to hold your age in bonds.

As you age, your bond holdings take up a bigger percentage of your nest egg and your stock holdings decrease, protecting you from a catastrophic setback at an age when you won’t be able to replace your loses.

Four Steps to Financial Success is a six-page pamphlet on building wealth, distilled into four simple, reliable steps. Continue reading online, or download the color pdf.

• An Introduction
• Step 1 - Start now
• Step 2 - Save enough
• Step 3 - Minimize expenses
• Step 4 - Own everything
• What’s next?

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Most investors skip this step and billions are made thanks to their oversight.

Investors spend countless hours trying to find an angle to give their investments a boost. This hope persists because the financial industry invests millions spreading the myth that you can beat the market.

Unfortunately, beating the market is highly unlikely, especially over the long term.

Focus on what you can control

If investors cannot control what their investments’ return, what can you control? You control how much money you give to your investment company.

This gift (the expense ratio) is really a fee for managing your investments. Most investors pay tens of thousands more for the same, but often sub-par, performance.

The cost of doing business

The expense ratio is charged annually, even when you lose money (returns are negative) and is expressed as a percentage of your total investment. Because large amounts are involved, the percentage is measured in basis points, one hundredth of one percent (0.01%). However, even small differences in fees add up over time.

Some investors are pretty generous, giving up two, three, four, even ten times as much for the same performance.

This generosity is not repaid. Over forty years, an investor simply paying 1% more (for the same 6% return) will lose over $192,000 compared to a more cost savvy investor. (see chart to the right)

To get the best deal, compare your current costs to this list of Vanguard’s funds. Vanguard pioneered low-cost mutual funds. Their expenses are generally the lowest in the industry because they are a non-profit, member-owned organization.

Four Steps to Financial Success is a six-page pamphlet on building wealth, distilled into four simple, reliable steps. Continue reading online, or download the color pdf.

• An Introduction
• Step 1 - Start now
• Step 2 - Save enough
• Step 3 - Minimize expenses
• Step 4 - Own everything
• What’s next?

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