The SUV (60%-40% fixed income / 40%-50% equity)

The SUV is useful and versatile. This is the type of vehicle that allows you to benefit from more stability on the road during storms while helping you to drive fast enough in beautifule weather. This asset allocation is usually qualified as a “balanced asset allocation”. You are basically looking to a half and half (fixed income / equity) structure.

- This is the most common type of investor according to investment guide: the balanced profile. While reaching 50% in both fixed income and equity, you have plenty of managed portfolios for your need. Select one that is well diversified in terms of geography and sectors of the economy (different industries) and that is low on MERs (management fees).

- If you are diligent in your research, you will be able to find package ETFs (exchange traded funds) that follow indices. Therefore, your stock portfolio won’t cost much in terms of Management fees and will track several indices (bonds, US market, Canadian market, International market and emerging markets for example).

- Mortgage funds, privileged shares’ funds or REITs can be added for the fixed income portion (I would avoid dividend funds as they are often sold as fixed income funds but they are still contain stocks for the most part).

The BMW M3 (30%-20% fixed income / 70%-80% equity)

If you have ever tried to race against a BMW M3, you probably realized that you need a pretty fast car to win! The M3 is very stable at high speeds and is not afraid to take a curve at 80 mph. However, if you push it too much, you can surely end-up in the ditch!

- Now, you are joining the most aggressive investors. Remember that growth portfolios reached almost -25% in 2008. If you think you can handle it, you can try managed portfolios. They offer a great investing opportunity as they rebalance your portfolio every 6 months to make sure that you keep the same asset allocation.

- However, I would lean more towards a combination of index funds, ETFs, money market funds (for liquidity) and bond funds.

- If you think you can handle the pressure, dividend funds or preferred shares funds could be a good alternative for your fixed income part. They will provide higher fluctuations than bonds or money market funds but they could provide a better return over the long run.

The Formula 1 (10%-0% fixed income / 90%-100% equity)

If you are in this category of investors, it means that you are married to the market (for better and for worse!). The formula 1 is the fastest car but don’t count on it to go through road blocks. High speed, but high fluctuations are part of the package as well!

- The only fixed income held in your investment portfolio should be money market funds for liquidity. This allows protecting your cash from inflation and you can withdraw this money at anytime to make your next investment move.

- If you have a systematic investment mindset, I suggest you purchase index funds with it. ETFs have a lower MERs (fees) but they cannot be bought on a monthly basis (without including the transaction fees). Be careful with index funds. Try to get general index (like index linked to S&P 500 or international markets) at first.

- If you prefer to trade directly, I suggest you open a brokerage account and get some trading courses (You can try these 10 trading lessons for free (no commitment or hidden subscription fees) from INO).

Author: Mike.

Image source:Jennifer Phoon, The Pug Father , A Geek Mom

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Unfortunately, most parents don’t have much financial education (thx to the educational programs in  our schools!) to pass on their children. We are literally thrown out of the nest like baby birds  in the hopes that we learn how to fly before hitting the ground of a recession and get eaten by the Wall Street wolves waiting for us!

Managing a budget and paying off your debts is certainly very important. Yet, if you want to go forward financially, you should also supplement you revenues and build asset accounts by investing money. So once you have learned how to manage your budget and live within your means, it is time to start thinking about investing. This is why I am creating this investing baby steps series. Before you go read an investment guide and build a stock portfolio, you need to know who you are.

Investing Baby Steps #1: Know Who You Are

If you go meet a financial advisor, the very first thing he will talk about is your investor profile. They will give you a questionnaire (5 to 10 questions) and will determine which kind of investments is best for you according to your answers. The investor profile describes:

#1 Your Investment project:

Are you saving to buy a house?

Are you looking for a retirement plan?

Do you want to travel with this money?

Do you want to build a safety net for the darker days?

Depending on the project you chose, different investment strategies can be suggested. For example, if you think of buying a house in 3-5 years, you are better off investing most of your cash in fixed income such as bonds (70 to 80%) and the rest in the stock market. But, if you want to build a safety net and this amount needs to be accessible at all times, you are better off with money market funds or a high yield savings account such as Smartypig.

#2 Investment Horizon:

Do you plan to cash your investments in 1 to 2 years or in more than 10 years?

Knowing that market cycles (going from a valley to a peak and back to another drop in the market) last, on average, at least 5 years, investing your money in stocks with a time horizon of 3 years is like playing blackjack at the casino. You could almost double your money or lose 40% of it.

#3 Your risk tolerance:

Are you able to suffer a 10% market drop?

Do you panic when you start losing money on paper month after month?

Are you able to understand the difference between a short term fluctuation and your long term objective?

This is usually the last part of the questionnaire as the first 2 parts are pretty easy to determine and straight forward. However, determining your risk tolerance is a bit trickier. First, nobody likes to lose money. Second, everybody wants to take “risks” when the market goes up and wants to get out when the market goes down. Third, we are creatures often ruled by our emotions and our rationale disappears when we get our feelings hurt.

Since we often drive our investment decision based on fear, and fear is often driven by ignorance, I suggest you read more about personal  finance and the economy in general. This is how you will understand that market drops like the one we experienced in 2008 happens regularly. The only difference with 2008 is that we got hit harder than usual, but investors suffered during the tech bubble as well. If we go back in time, we have gone through several painful experiences as investor. But we always survived and so did our investment portfolio!

So the very first step before starting to invest is to determine your investor profile. I would suggest you meet a financial advisor so he can help you understand the questions and provide additional information regarding the market. But don’t sign any investing papers besides your investor profile during the first meeting (of course, he will tempt you to invest right away ). Take the time to fully understand what you want and what you are willing to go through in terms of market fluctuations before you start investing.

Next Thursday, we will look at different investment portfolios according to different investor profiles.

Author: Mike.

image source: polifemus

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Important: I am not an economist or an investment advisor. Everything you read here is simply opinion based on my limited knowledge and (hopefully) a little common sense.

Lately, I have been hearing all kinds of advertisements for gold. Whenever my six year old sees those “cash for gold” commercials, she tells me to sell all our gold for money. The problem is that we have almost no gold . . . jewelry or otherwise and that does not look like it will change in the near future.

The other kind of gold advertisement is the kind that pushes gold as a good investment in poor economic times. An investment in gold is a “hedge against the falling dollar” or a way to “combat inflation”. I often see and hear supposedly credible pundits and celebrities pushing gold on television and radio.

But I do not buy their pitch completely. Though I share much of the negative outlook on the economy, I am hesitant to purchase gold as a way to protect my family financially for several reasons:

Buying gold is still an investment

If I purchased gold, I would only purchase real, physical gold, also known as direct ownership. I would not invest in gold by means of indirect ownership through certificates, accounts, spread betting, derivatives, shares or any method by which I do not have the gold in hand or safety deposit box. Indirect ownership seems to come with the same risks that all other investments bring. I am not against investing, but the point of buying gold is to hedge against the worst case scenario. If the worst were to happen, all investments will plummet in value.

Performance

Again, I am not an investment guy, but the reality is that gold has not really performed well as an investment. The price of goal has only averaged about a 1 percent increase every year. However, not that many people do not buy gold as an investment, but rather as a commodity that rarely, even in the worst of times, loses value.

Price

I simply cannot afford to put any money into gold. The way the price has jumped up recently would probably prevent me from owning even an ounce.

Intrinsic Value

This is the bottom line for me. Gold has no real intrinsic value. Gold cannot be eaten, it cannot grow food, it will not cure disease, it cannot provide transportation by itself. Common sense says that if inflation goes through the roof and life becomes a daily hand-to-mouth struggle, I believe that barter will become the preferred currency and all the gold in the world will not feed your family.

Money has value because the person to whom you give it is confident that he can exchange that same currency for necessary items. Gold holds the same type of value. If things go really bad and your family is able to grow or hunt food, you will survive. Even if people have extra food, they will be hesitant to exchange it for a heavy, useless lump that cannot be eaten or provide any practical function.

Like I said, I am not an economist or an investment expert. I am not completely sure that my thoughts on this subject are correct. What do you think?

Article by Stew

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I am really discouraged about my retirement savings.

I understand the importance of saving for retirement, but debt reduction is our number one priority right now.

My job has a great 5% matching program, but we are still almost living month to month and cannot seem to squeeze out the extra money necessary to enter this program.

I am 35 years old – not too late to start saving, but every day I am losing money.

I do not have any hope of ever seeing a social security check. The program is already bankrupt . . . I hate watching my social security payroll deduction and the employer half poured down the drain every month. Sigh.

At this point, my main support in retirement will probably come from my children . . . maybe we should have a few more.

Retirement is more or less a western phenomenon and there are certainly people in the United States who never retire. Health permitting, I could work for as long as I live. It is not a terrible thought, I like my job, but if my health does not allow it, we could be in trouble.

The chances of getting a major inheritance from someone in our family are remote. My wife and I basically come from the same background – parents who were frugal, worked hard, but mostly worked for low salaries in non-profit, ministry-type professions. I don’t think either of our respective parents will leave us much of an estate. Our grandparents might have some money saved, but by the time it gets distributed to all of the grandchildren, there will not be much left. We are in no way upset by this, it is just a fact.

I had the capability to have saved $500 to $1,000 per year, every year during college and afterward until I was married at 27. I wish someone had pulled me aside and showed me how to open some kind of retirement account back then. Even if I had quit contributing when we were married or when our kids were born, we would still have a nice amount saved up.

We are doing our best, but right now there just is not any money available for retirement savings. Ultimately, we will have to trust that God will meet our needs when the time comes. I know that He will. It just might not be a nice retirement home in Del Boca Vista.

This world is not my home I’m just passing through

my treasures are laid up somewhere beyond the blue

the angels beckon me from Heaven’s open door

and I can’t feel at home in this world anymore

They’re all expecting me and that’s one thing I know

my savior pardoned me and now I onward go

I know He’ll take me through though I am weak and poor

and I can’t feel at home in this world anymore

Just up in Glory Land we’ll live eternally

the Saints on every hand are shouting victory

their song of sweetest praise drifts back from Heaven’s shore

and I can’t feel at home in this world anymore

O Lord you know I have no friend like you

if Heaven’s not my home then Lord what will I do?

the angels beckon me from Heaven’s open door

and I can’t feel at home in this world anymore

I know that heaven is my real home and I am confident in that fact, but if you have the opportunity and ability to save for retirement -do it! (because I might need to call you for a loan)

- Article by Stew

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I am not a financial advisor, nor do I play one on the internet. So the following story is not necessarily an example for anyone to follow. In fact, you might find a conflicting piece of advice right here on this blog. The coming months and years will tell if I made the correct choice.

I cashed out one of my IRA accounts last week.

It was a Simple IRA from a part-time job. I have not worked for this particular employer for over a year and I am not likely to work there again. The account was held by Vanguard and my experience with that company was positive. I hope to invest there again, if I ever have the opportunity.

Most financial advisors will tell you to never cash out a retirement account before the age at which you can avoid fees – you should probably listen to those advisors. I know that my actions fly in the face of conventional wisdom, but here are some of the factors in my decision and you can tell me if I made the right choice:

Fourteen months ago, this particular account was worth almost $3,000. On the day that I called to cash it out, it was worth just over $1,800.

Because I cashed out before the age of 59 years, six months, I will pay a 10% IRS penalty on the value of the account.

Since my contributions to the account over the past five years were “before tax” dollars, the cash out will be counted as income against my 2009 tax return. This is not a big deal since I have almost no income tax liability anyway, so the redemption will only reduce my refund slightly.

If I could still contribute to the account, I would have kept it, but SIMPLE IRA contributions can only be made as payroll withholding. I could no longer add to this investment

The SIMPLE IRA was invested in two different mutual funds. Both had an annual fee of $25 apiece. Fifty bucks a year is no big deal if the value of your account is $5K or $10K or $40K, but a $50 fee placed a de facto load of 2.7% on my account. Unless the mutual funds did better than 2.7%  every year, I was losing money.

The real loss was in the number of shares that I held in the two mutual funds. Those shares had doubled in value and then lost that value during the time that I held the accounts.

From the big picture perspective, we broke even on this deal. Ultimately, the market drop and the ten percent penalty only represent the approximate value of my employer’s contribution to this fund. It is tough to look at all the money that we left on the table , but the reality is that we actually recouped all of our original investment.

Right now, our family budget is as tight as it can be without adding debt.  We are currently meeting all of our expenses each month, but if we hit a snag with car trouble, doctor bills or some other unexpected financial challenge, our only option will be to charge up our credit cards. And there is nothing I hate worse than paying credit card interest. The money that I will get from the cash-out currently represents about half-month’s worth of expenses. The Simple IRA has become our emergency fund.

It is too early to tell if I made the correct decision or not. Possibly, in ten years, I will wish that I had left the money alone. On the other hand, there is no guarantee that the account will be worth a significant amount in the future. The market would have to come back in a huge way in order for this small account to overcome the fees and the lack of contributions.

I think the bottom line is this: God promised to meet our needs and he kept his word. Six years ago, when my employer asked if I wanted to start contributing to a Simple IRA, I thought the purpose was start working on my retirement nest egg, but He knew we would need this money during a cash crunch in early 2009. I would like to save more for retirement, but it isn’t possible right now.

Right now, I do not see how we will have enough money to support my wife and I in retirement. While I am committed to finding a way to restart our retirements, the reality is that I do not need to worry about it.  God met our needs today and I have more faith than ever that He will meet our needs forty years from now.

I have another even smaller Roth IRA account that I might also cash out in the next couple of months. Maybe you can “Monday morning quarterback” my decision. Feel free to offer an opinion, advice or a rebuke. Fire away!

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It can be really intimidating to talk to a professional adviser sometimes.  They know the lingo and you may not. And of all the confusing financial concepts, the relationship between bonds and interest rates can be uber-confusing.

It’s critical to understand this relationship for a few reasons:

1. I don’t want to be the first to bring this to your attention…but….eh….in case you haven’t noticed, interest rates are pretty close to zero.
2. You might be tempted to invest in long-term bonds right now to earn a bit more interest.
3. If you do that, you will get your clock cleaned when (not if) interest rates rise.

Here’s why.

Bonds go up in value as interest rates decline.  That’s good.  But unfortunately, the inverse is also true.  As rates go up, the value of the bond declines.  The reason for this is that bonds are valued based on the income they produce. Read that again.  It’s very important.

Look at the table below to understand this relationship.

For our example, assume you invest $100,000 in year 1.  The market rate of interest is 5% so you get $5000.  This amount never changes – unless the company who issued the bonds goes broke – in which case you won’t get a cent.

So, in year 1, you’ll receive $5000.  And you’ll get $5000 in annual interest as long as you own the bond or until it matures.  Once the bond matures, you’ll get your $100,000 back – as long as the company who issued the bonds doesn’t go belly up.

In year 2, interest rates plummet.  The current market rate drops to 1%.  Of  course you still get your $5000 interest check. It doesn’t go down. So what happens to the value of your investment?

YOU JUST MADE A KILLING!  Your $100,000 investment is now worth $500,000!  Why?  Well…you tell me.  Remember, you still get your $5000 because you invested last year.  If another investor comes along and wants to earn $5000 in interest in year 2, how much will that person have to invest?  (Remember…..interest rates fell to 1%.)  If you said that the new investor needs to pony up $500,000 to earn $5000 you are right.  So, in year 2 if Ms. Investor comes to you and wants to buy your bond, you won’t sell it for less than $500,000 because you know that she would have to invest $500,000 anywhere else in order to replicate the $5000 income.  Kabish?

Now consider, if you will… year 3.  Interest rates skyrocket to 10%.

Now how much will I have to invest in order to earn $5000 in year 3?  The answer is $50,000.  I can invest $50,000 at 10% and earn $5000.  If you want to sell your bond in year 3 the most you’ll get is $50,000.   Why would I pay you a nickel over $50,000 to buy your bond? I can generate the $5000 by investing only $50,000 elsewhere when rates are 10%.

It doesn’t matter what you paid for your bond.  It only matters how much interest your bond generates.

So if you make the mistake of buying long-term bonds when interests rates are low (like now), the value of your bonds will decline rapidly when rates go back up.

It is true that if you hold your bonds to maturity, the fluctuations really don’t matter.  At maturity, you get the face value of the bonds.  In this case, you’d get the $100,000.

However, if you believe, as I do, that rates are going to go up over the next few years, it makes more sense to stay with short term bonds now and buy long-term bonds only once the rates have already increased.

Does it matter to you that bond values fluctuate?  Are you prepared to wait it out? How long?

This was a guest article by Neal Frankle, CFP who provides straight forward advice on how to increase your net-worth at his blog Wealth Pilgrim. If you you’ve enjoyed this article, consider subscribing to his RSS feed.

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I don’t check my 401k balance often at all.  I prefer not to stress about it and just let it grow.  I’m investing for for the long haul and know that overtime my money will grow at a 10-15% increase.  I do check it though.  Mostly to see if I need to adjust my funds distribution a little based on individual mutual fund performance.  I logged in last week to see how things were going, especially with the stock market tanking like it has recently.  While I wasn’t shocked, I was very surprised…

My 401k is losing money and dropped 20,000 over the past 2 months.  Yes, that’s 20 with 3 zeros!  I’ve been contributing to a 401k program since the very first day I started working after graduating from college.  The percentage varied from 1% – 10%, but I’ve always contributed.  Until I checked last week, I had never lost money…never.  Seems there is a first time for everything, and what seems to be a trend with me is that when I do something, I do it big time.  That was a big time loss.

What to do when your 401k is losing money

I wrote a few months back about what to do if you started seeing your 401k losing money.  My advice then was to hang in there and keep investing.  The market at the time was beginning a downward trend, but only gradually.  Since then the overall decline has become far more significant.  Now what do we do.

I’m sure I’ll get a great deal of replies from people that disagree, but I’ll stick with my initial advice: Stay the course.  The advantages of a 401k program are far more than just investment growth.  There are tax benefits and in many cases employer matching. The money you place into your 401k is removed when your taxable wages are calculated.  That means that right now, you don’t pay any tax on your 401k contribution and your taxable wage amount is reduced by the amount contributed into the 401k plan.  Not to mention, you don’t pay any taxes on the interest or growth in the account, for now.  I say for now, as once you do begin pulling from your 401k later in life, you’ll be required to pay taxes.  For this reason alone, continuing to contribute is a good idea.

Dollar Cost Averaging

Regarding stock growth, the important thing to remember right now is the concept of dollar cost averaging.  Your 401k is losing money now, but will it continue?  With the stock market, their are no guarantees.  If you are young and have your 401k money invested in high growth stocks than your risk for losses are high…but your risk for big gains is high as well.

Dollar cost averaging basically deals with the fact that in a 401k program, you are most likely contributing a basically fixed amount into your 401k program.  That same amount gets invested each and every paycheck.  Sometimes you’re buying stocks low, other times you’re buying high.  Right now, we’re all buying low…real low.

Sound familiar?  It should, it’s the old stock market golden rule of “buy low, sell high”.  Right now, you’re buying more shares for the same money..lots more.  When the market does turn and contrary to all of the stock market chicken little’s running around screaming the sky is falling, it will return all of that stock purchased at a low cost will yield high returns.

The math is a bit complicated, but dollar cost averaging basically states that market fluctuations yield higher returns in the long run.  Does this mean we should all run out and buy tons of stock and maybe even bump up our contributions?  Maybe, but I’m not a fan of trying to “time the market” as this strategy is called.  I personally prefer to invest a fixed amount over time and let it average a high return for me.  This is the essence of dollar cost averaging.

The tortoise and the hare

Remember the story of the tortoise and the hare?  Slow and steady wins the race right?  There are of course “smart hares” that by pure luck or my pure skill win big.  There are non so smart hare’s that lose big too.  I prefer to be the tortoise.  I just keep investing at a steady pace and watch my investments slowly and steadily grow.  I’m not an investment guru, nor do I even pretend to be one.  What I do know is that over the 15 years I’ve been investing, my 401k balance has slowly grown.  Sure it’s losing now, but that’s just part of the ebb and flow of the market.

My advice?  Hang in there and don’t watch your balance daily, weekly, or monthly.  Just let it slowly grow over time.

The only caveat to this advice is if you are older and closer to retirement.  If that’s the case, I’d highly recommend you engage a professional to get some advice.  Being closer to retirement, you have less time to recover your current loses and it just might be a good time to move your allocations into more stable funds.

What are you guys doing with you retirement money?  Are you staying the course, making changes, stopping contributions?  Share your perspective and thoughts.  Add  a comment!

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I received a letter from my employer the other day stating that they will begin offering a Roth 401k program in addition to our traditional 401k program beginning in 2009.  I had read a little bit about them in the past, but decided since they were now an option for me to begin utilizing, I should probably learn more about them and wanted to share my findings with you as I understand they are becoming more and more prominent.

What is a Roth 401k?

The Roth 401k program allows you to contribute post-tax dollars to an individual retirement account but allows for tax-free growth and distribution.  This differs from a traditional 401k program in that a traditional 401k contributes pre-tax dollars for contribution and then upon distribution is taxed at normal levels.

How does a Roth 401k differ from a traditional 401k?

A Roth 401k is very similar to the traditional 401k program, but with three primary differences:

1. Contributions to your Roth 401k are done after taxes, not before like a traditional 401k.  The negative here is that the Roth 401k doesn’t reduce your taxable income.
2. Distributions from a Roth 401k are tax free.  Distribution requires that you’ve been contributing for at least 5 years or are 59 1/2 years old or more.

The Roth 401k advantage

The  big advantage of the Roth 401k is to those that expect to be in a higher tax bracket when they retire than they are now.  The Roth 401k deducts taxes at contribution time hence if you will be in a higher tax bracket when you retire, you’ll be paying far less taxes than you would with a traditional 401k program.

For example, let’s say you contribute $20,000 to a Roth 401k.  If you 20,000 grows to $60,000 over the years than at retirement (or distribution time) you pay no taxes on the $40,000 gain.  This differs from a traditional 401k plan in that you would pay taxes on the entire $60,000 at distribution time.

Is the Roth 401k the best option? This is a tough and complex question to answer due to inflation, marginal vs. effective tax rates, etc.  The models can become very complex, but based on my research in almost every scenario the Roth 401k provides you with more retirement money than a traditional 401k.  Deciding on which option to choose should not be made lightly though.  I would strongly advise consulting with your employers HR area where they can provide further data based on your income, tax rates, and age.

Final considerations

There are few additional items to consider:

• Your employer may or may not match contributions to the Roth 401k.
• You can contribute to both a traditional 401k and a Roth 401k as long as your total contributions do not exceed IRS regulations.
• You can convert form a traditional 401k to a Roth 401k, however you will be taxed.

Does your employer offer a Roth 401k?  What are your thoughts?  Are there any considerations I’ve missed?  Add a comment!

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It's a long way down

As many of you know, my day job is in the banking industry.  Over the past couple of weeks, I’ve been slowly watching my companies stock plummet.  It seems each day brings another significant drop.  I don’t pay real close attention to my 401k balance.  Typically, the only time I even look at it is when I receive my quarterly statement, or need to update my How To Determine And Track Your Net Worth.  Due to the declining market, I decided to take a peek.  Like most, I’m losing money in my 401k.

Losing money in 401k

Over the past few months, my 401k value has been slowly declining.  But from June to July the value dropped 3.5%.  Since this same time last year, my value has dropped 11.6%.  While not earth shattering, when you are used to seeing increases of 10% or more each month a 401k value decline of more than the same amount is a bit tough to swallow.

All of my funds are allocated out to high-risk mutual funds with reputable companies like Vanguard and Evergreen.  I am not an investing expert, so would rather let these experts handle the investing for me.  The track records on both companies have yield good returns in the past.  The problem is the down market.  Even the best performing funds are hurting right now.

Don’t withdrawal money from your 401k

The big question these days is should you pull money from your 401k or consider moving your money into more conservative funds.  That of course is a very personal decision.  Since I am fairly young (38) and believe the market will recover I am staying the course.  Right now I’m losing 401k money, but my funds are buying stocks at very low prices.  Given the market’s history, and the cycles our economy seems to go through, when the economy does finally recovery, the stocks my funds have purchased at low prices should really do well.  I am in my 401k for the long term and even though I’m losing money in 401k, I’m staying the course.  20 plus years at least and maybe even more, that of course depends on if my dreams of early retirement come true or not.

If you are older and closer to retire, especially within 10 years than it might be appropriate for you to consider other options like moving your 401k allocation to more conservative funds.  Under no circumstances would I recommend pulling money out of your 401k.  The penalties and fees just aren’t worth it.

Stay the course

I’ve decided not to look at mine for a while.  Given I’ve decided to say the course, it’s just too stressful nor is it reasonable to watch your 401k day to day or even month to month.  I recall receiving huge gains in my account during the 90s.  Now with our down economy and the continued fall of the markets, we’re seeing a downward trend.  It’s all part of the ebb and flow of the market.

I believe it will recover.  How about you? Are you making any changes?  Are you losing money in your 401k?  Share your thoughts my adding a comment.

Photo credit: destinelee

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The following is a guest post by Becky at Family and Finances, a blog about finances and saving money. If you like this post, consider subscribing to her feed via RSS.

Remember the tech stock boom and, later, the bust? Doesn’t it bear some resemblance to the housing boom and, now, bust? In both cases, investors put too many eggs in one basket, and that basket broke.

Obviously, the key to successful investing is to diversify your investments. Here are some tips:

Do not hold more than 10% of your assets in one single company. This is easily done with mutual funds, which invest each of your shares in multiple companies. Of course, the rule also applies if you’re investing in stocks, bonds, or other securities. I personally prefer to keep less than 5% of my assets in a single company through mutual fund investing.

Get out of your employer’s company stock. The 10% rule holds true for the company you work for. A lot of companies pay profit sharing, 401(k) company matches, and bonuses in the form of stock in that company. Find out if you can move that to a mutual fund or other security. A lot of the time you can.

Many people have faith in or loyalty to their employers and like to own a large percentage of company stock in their retirement plans. I really feel that this is a bad idea. What happens if your employer goes bankrupt (think Enron)? Not only would you lose your job, but your retirement plan would tank as well! This is why I recommend keeping a maximum of 10% of your portfolio in your employer’s stock.

Be wary of the next big thing. It’s easy to agree to limiting your exposure to tech stocks and real estate; you’ve seen what can happen. The hard part is remembering that this same thing can, and probably will, happen in the next booming sector.

I’m not saying you should completely avoid industries that are performing well, but by limiting your exposure to any single sector, no matter how “hot” it is, you’ll avoid being decimated in the bust. In fact, while the recently “hot” industry is going down, one of your other investments will probably be going up! The key is to diversify.

Now here’s the fun part. Let’s hear some predictions! What do you think the “Next Big Thing” will be in investing?

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