Thursday, May 15, 2008

Retirement Investment Planning

CNN Money has some helpful advice on where to hold your investments. Ideally, all savings would be in a tax-advantaged account (401k, IRA, etc.); but when the amount you have to invest exceeds the limits for these accounts, give bonds priority to tax-advantaged accounts (starting with a 401k, if you have one), then add stocks. Bonds give off more dividend income, which is directly taxable, so these should be as tax-protected as possible.

This leaves the question: What, exactly, should one buy? They suggest a seven-fund portfolio of stocks, bonds, and money markets (with recommendations for funds in each of the seven categories). While this may be a good goal to work toward, such a diversified portfolio could be difficult to achieve straight off the bat (the cumulative minimum investment is something like $15,000). When I opened my IRA, I took a tip from Adam Bold and started with the Selected American Shares (SLASX). Since then, I've come across suggestions that he may not be the most trusted of advisors, but I think Selected was a good choice, nevertheless: Although it's not likely to impress anyone with record returns, the fund rather consistently beats the S&P 500 and has achieved an annual rate of return over the last 10 years of 8%. As such, the Selected funds seem to me to provide a nice stable base from which to develop a fuller portfolio in the future.

The CNN Money article also included three simple plans for asset allocation between the seven different types. My father once shared a rough rule of thumb for retirement-savings asset allocation: He said that the percentage of stocks in your portfolio should be about 100 minus your age. I was pleased to see that the CNN Money's plans were pretty close: In early career (20s), they allocated 80% stock; in late career (say 40s), they allocated 60% stock; and in retirement (60s), they allocated 40% stock. Of course, it's certainly nice to have the more-detailed suggestion of how much of what kind of stocks and bonds to purchase, which the article provides.

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