| A few weeks ago I wrote a column about "Brad,"
who described his retirement planning philosophy. Brad has done a great job of investing
for retirement, and we highlighted some of the aspects of his strategy that has led to his
success. The column inspired many e-mails, mostly by women wondering if he might consider
leaving his spouse sometime in the near future. However, there was a tendency for some to
question whether his approach applied to them, such as the following letter. "I am happy for Brad. But his ideas don't apply to me, because
I am not making as much money as him. Do you have any suggestions for the rest of
us?"
I picked Brad as an example because of the many things he
did well, not because I expected readers to be able to emulate every aspect of his
strategy. However, in light of the comments I have received, I want to divide Brad's
strategy into two parts — how he invested his money and how much he invested.
Where to Invest
Brad followed a set of principles that are applicable to
everyone, regardless of age or income level.
- He used a long-term and consistent investment policy, and
did not alter his strategy due to short-term fluctuations in the market. Such steadiness
is a key to success in investing. In remaining consistent, he avoided selling stocks at
the bottom of a market and buying into hot sectors just before a fall.
- Brad held a large proportion of stocks at an early age.
Whether the correct proportion is 60%, 80%, or 100%, nearly all financial advisors suggest
that when an investor has a long time horizon, the best way to accomplish their goals is
to invest the lion's share of their portfolio in equities.
- He practiced broad diversification. We never know what the
best sector of the market will be. The best thing to do is to ensure that you are widely
diversified across all of the sectors of the market — particularly across
large-capitalization stocks, small-capitalization stocks, and international stocks.
Many of you objected to the enthusiasm I expressed about
Brad maxing out his 401(k)-plan contribution, and even objected to investing additional
monies outside his 401(k). I complimented Brad in his willingness to do this, sacrificing
current consumption for future security. Several of you felt that investing such a large
proportion of income was well beyond your means. Some of you also said that the fact that
you couldn't invest as much as you would like impacted your investment strategy.
However, the amount of money you have should not impact
your strategy. Your overall investment strategy should involve willingness to take risk
and your personal time horizon. Some of you felt that because you invest less than Brad,
you should take more risk to make up for the shortfall in contributions. This is not the
case. Taking risk for risk's sake is not going to make you any wealthier in the long run.
Trying to switch in and out of funds frequently and attempting to time the market may add
risk, but usually this just ends up hurting returns.
How Much to Invest
As for as the amount you should invest, I complimented Brad
again because he devoted as much as he could to his retirement plan.
The decision of how much to put away is a difficult one and
requires a lot of sacrifice. I cannot give you a general rule of thumb because each
person's investing situation is different. Furthermore, the decision of how much to invest
changes over time.
Personally, three years ago I had a lot more ability to
invest than I do now (back then, I earned more cash income, had lower housing expenses,
and had not yet discovered the joy of writing five-figure checks to members of the
American Society of Orthodontia).
However, I can say three things about the right amount to
invest. First, we learn many lessons from our parents, but there is at least one lesson we
shouldn't follow. The majority of people retired today receive a nice pension in addition
to Social Security benefits. However, the number of people who will receive a pension is
declining sharply every year. So just because your parents may not have worried about
investing for retirement does not mean you shouldn't.
Second, as a general rule, most of us who say we can't
afford something are not telling the full story. We can really afford to save more —
we just don't want to give up our current lifestyle. It may mean driving the car an extra
couple of years before trading it in, or foregoing a vacation, but most of the time we can
put away a few hundred bucks extra if we really have to.
Third ... we really have to. The most depressing e-mails I
receive are from readers in their older years who are realizing that they will not have
enough to retire on comfortably. In nearly all of the cases, the reason they have
deficient resources is not because they invested in the wrong choices, but because they
invested too little. And, now that they are in their late 50s or 60s, there is not a thing
they can do about it.
I know if those people could go back in a time machine,
they would choose to save more. How? By simply consuming less. It's a simple but elegant
concept — consume less.
This, more than anything else, was the cornerstone of
Brad's investment strategy. He made investing for retirement a priority.
 Lummer's
Logic Archives
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