In the words of Fox Mulder, "Trust No One."
Now I don't really mean that. In fact deal with those you do trust. But when it comes to your money
, trust them to give you advice, but you ultimately must know what is going on and what you're doing. It's your future. Don't turn all the power over to someone else.
With any professionals I believe in paying them a fair rate for their time. But advice is the limit of what I would seek. It's easy to make one's on trades. Have them help you develop a strategy consistent with your age, your wealth, your goals, and your risk tolerance.
Now, one caveat. I've heard the 5% minimum stated so many times and seen so many people not achieve it. While it may be an average over some periods it is not over all periods and one or two bad investments can make you achieve less. Frankly, I'd shoot for that but also have a plan for only achieving 3%. One other factor is that the 5% is pre-tax. The income
is mostly taxable at some time. Deferring it doesn't make it tax free. So 5% turns into 3%.
The plan is different for everyone. Here is ours, just as an example, and by no means presented as right for others.
We first set aside an amount we need to keep liquid. This is based on anticipated large expenditures and possible emergency
needs (such as engine
rebuilds on boats).
Then we have divided the remainder into five parts
1. US Treasury Securities. Very conservative. We do not believe in Treasury Funds from Brokers or Fund managers. They introduce an added element of risk. We purchase
these securities with various terms and expirations. We buy direct on Treasury Direct and we average only about a 4% return. Note that it is taxable as well.
2. Municipal bonds. States, Cities and other entities. We average about 5% and the beauty here is that they are exempt from US income
tax. Now, while generally safe, they aren't guaranteed. Again we would not buy a bond fund, only straight bonds. But that does mean we don't want any single
bond to be large enough that if it failed completely it would lose more than the others make in a period of say two years. That would mean no bond over 10% of all the bonds and ideally none over 5% of the total.
3. Mutual funds. Mutual funds can be the ultimate diversification. We only buy mutual funds that invest in stocks. We look at those companies that have the best long term records and so are a bit conservative. No single
fund will be more than 10% of our fund investment and ideally no more than 5%. The returns here have been about 8% over the history
of our investments. However, at one time that number got as low as a cumulative 3% when the economy collapsed. We also strive for funds that don't just duplicate each other, investing in the same stocks.
4. Stocks. We purchase
online. Here's where I note that we use five online brokers. That's just our conservatism in spreading it out. That's mainly to protect the money
we're transferring in and out. We purchase small amounts of solid companies through stocks. We don't look for the get rich quick type investment. Again, like mutual funds, we've averaged 8% pre tax but that number has been negative a couple of years and the cumulative has been as low as 3%.
5. Direct investments in income producing properties or businesses. Now we choose small businesses to own but properties are more appropriate for most. Not speculative properties, but rental properties with regular revenues and profits. On rental properties annual income may be 3% to 10% but in addition they may grow in value. However, they do have risk. Businesses can provide greater profits but have greater risks. In any of these investments, one should never invest so much in one property or business that if it failed completely they couldn't absorb it. This area of investments may not be appropriate for most people. My background makes it more so for us. As to businesses, we only get involved with those already operating and profitable.
The keys to me are diversification, risk protection, and setting moderate goals. And keep an eye on it yourself. Get good advice but keep control yourself.
We don't invest in hedge funds or options or derivatives. Yes you can make money in them but you can lose it too. No penny stocks for us.