Wes Moss: 4 time-tested financial tips from 2010

Wes_Moss-for-Web-smaller-fiCertified financial planner Wes Moss provides personal finance advice and accessible investment strategies. His guest post appears here weekly.

The end of the year is a natural time for reflection, to look back at the past 12 months and assess our performance and progress in every aspect of life. I spend a great deal of time trying to figure out what financial strategies were most effective in helping our clients move toward their financial goals.

Guess what? I come up with many of the same answers every December! And that’s a good thing. It shows that a commitment to the fundamentals of personal investing will serve you well, regardless of the economic weather. Here are four of those perennial truths:

1. You Gotta Believe. Because retirement seems so far away and/or unattainable, some people write it off as an impossible dream or simply choose to ignore it. They don’t plan for it. They don’t save for it. They don’t invest for it. Big mistake. As Henry Ford said, “Whether you believe you can, or you can’t – you’re right.”

Retirement is possible! In my work as a financial advisor I congratulate a steady stream of people in their 60’s and 70’s who have stopped working (by choice) and are off to start living life on their own terms. Who are these people? Business tycoons? Pro athletes? Nope. They are your neighbors, regular folks at all levels of income who made a commitment at some point to get the fundamentals right.

2. 401Ks Rule. Sign up for your company 401K plan – right now. Maximum contributions are $16,500 and $22,000, depending on your age. Try to contribute at least what your company is matching with “free money.” Many plans match 50% of the first 6% of your salary deferrals. If you put in 6% of your salary, your company will tack on another 3%, putting you at a very respectable 9% savings rate for the year.

As a rule of thumb, if you save 10% or more of your income for 30 years, you will have saved enough to pay yourself a “salary” in retirement comparable to what you earned on the job.

Remember, too, that 401K contributions are pre-tax, meaning every dollar you put in a 401K account reduces your taxable income by a dollar.

3. Set it and Forget It. Dollar Cost Averaging is a disciplined approach to investing that helps take the emotion (fear and hubris, mostly) out of your decisions, and allows you to smooth out the inevitable ups and downs of the market.

Here’s how it works: Instead of plopping your entire nest egg into a mutual fund or basket of stocks all at once, you trickle your money into those investments in a series of same-sized regularly timed (monthly or quarterly) share purchases. You make your scheduled investment whether the market is up or down.

If you had invested $100 in the S&P 500 Jan 1, 2008, today it would be worth $92, a loss of about 8%. However, if you added $25 over each of the four quarters of 2008, for a total of $100, today that investment would be worth $103, a return of 3%. Why the difference? Because dollar cost averaging forced you to buy shares at lower prices as the market went down in 2008. As a result, you had more shares in your portfolio when the market rebounded in 2009 and 2010.

4. Join the Bucket Brigade. Asset Allocation is a fancy Wall Street term for spreading your money across several different types of investment baskets, or buckets. It’s a reliable strategy for protecting yourself against the uncertainties of markets and economies. Simply put, you should be invested in areas of the market place that don’t necessarily move in tandem and thus may offset each other’s short-term losses.

In the spring/summer of 2010, the stock market fell nearly 17% at one point. That’s a nasty hit. But if you also held bonds or bond funds in your 401K during that same time you would have seen an increase of more than 2%. This is a perfect example of how the Income bucket (bond holdings) helped investors at a time when the Growth bucket (stock holdings) struggled. Keep this in mind when making your investment decisions for 2011: Don’t have all of your eggs in one bucket.

– By Wes Moss, for Atlanta Bargain Hunter blog

4 comments Add your comment

Let the Big Dawg Eat

December 27th, 2010
1:31 pm

Good advice. I wish Wes Moss had been around 30 years ago when I started out in the “real world” after mooching off my parents through college.

the Grinch

December 27th, 2010
2:34 pm

Set it and forget it is great advice. Your nest egg is quietly growing for you.

Get the Facts

December 27th, 2010
6:52 pm

Does it make sense to defer taxes into a 401k if you will be at the same or higher bracket when you retire? I am pretty confident I will be at my current tax bracket or higher in the future so why would I want to put money into my 401k where I can’t use it and could pay a higher tax in the future?
With all the unfunded liabilities our Federal Government is responsible for, don’t you think tax brackets will increase in the future.


December 29th, 2010
9:49 am

Re: Get the Facts. This is exactly why I look for all things Roth. I know I’m paying taxes for it now and my rIRA and r401(k) contributions cut directly into my available spending, but for me it’s worth the future tax avoidance. In my opinion, Roth anything is the best savings vehicle for anyone under age 30. It’s a beautiful thing to know I’ll draw tax-free, penalty-free funds during my retirement.