How does SALSA mix with investing? Well it’s really 5 tips to help with saving for retirement. I also love Mexican food so I’d thought I relate my advice to SALSA.
Start Early – this is my number one tip and is most advantageous for young adults. When many things seem out of your control, your cash flow shouldn’t be one of them. Yes, you have probably seen those charts that the earlier you start the more money you will have at retirement but I believe it is important to start early for 2 other reasons. First, you cannot spend what you do not have. It is very hard to change your lifestyle when you’ve been accustomed to it for a long time. I see many pre-retirees that did not start saving early which has caused them to alter their lifestyle as they approach retirement. Saving in your retirement account can lead to a domino effect which leads me to my second point. Saving can lead to good habits in your daily life. If you keep to a budget you can stay away from wasteful spending. The clients that are prepared for retirement are the ones that understand the importance of saving at a young age.
Always Diversify – We have all heard the cliché “don’t put all of your eggs in one basket.” This is a bit of an outdated rule of thumb when it comes to investing in the sense that retirement plans, including 401ks, don’t typically offer individual stocks or bonds. Rather they offer a line of different mutual funds. Mutual funds hold many stocks and/or bonds. So if one of the stocks held in the mutual fund went out of business it wouldn’t affect you as much if you held that stock individually. It is important to go one step further and diversify with different asset classes. Asset classes include U.S. Equities, Bonds and International Equities. There are many other asset classes but these are the main asset classes you should hold in your retirement plan. Rick Ferri, researcher and investment manager, states in his book, “All About Asset Allocation,” that it is a good rule of thumb for younger people is to hold your age in bonds. That is if you are 25 then you should hold approximately 25% in a bond fund. It gets a bit trickier when you are nearing or at retirement because life introduces additional details that an investor must consider (i.e. accumulation of wealth, shorter time horizon, etc).
Low Cost – I always tell clients, control what you can and don’t worry about what you cannot. Mutual fund expense ratios affect returns especially over a long period of time. Take a look at Vanguard’s 3rd principle on investing. The studies at the bottom illustrate how costs can be the single factor for inferior returns.
Simplicity – Keep it simple. Many 401k offer many options; too many in some cases. I’ve seen people invest in 10+ different funds but that can be counterproductive. The idea is that the more funds you invest in the more diversified you will be. That’s not necessarily the case. Many 401ks offer target date funds or risk based funds that offer diversification in one fund. Individuals starting out should take a look at these funds as it is a simple way to diversify.
Avoid Performance – Inside a 401k packet is a list of funds, their performance, and their expense ratios. “Past performance is not a guarantee of future returns.” I tell clients not to look at how the fund has performed because there is a good chance that the fund will be in the bottom next year. S&P Indices Versus Active (SPIVA(R)) measures the performance of actively managed funds against their benchmarks. The number of funds that beat their benchmark quickly diminishes over 3 and 5 years. What’s more important are the asset classes you select and their expense ratios.