12 Timeless Tips for Financial Security

August 31, 2023

Not long ago, while digging through a box of old papers, I came across a stack of articles written by my former business partner Ken Petersen. One of his articles outlined “12 Rules for Financial Security.” Reading through them, I was impressed by his sage counsel. Ken retired a few years ago, but his rules are timeless. Here are Ken’s 12 rules, rechristened for this week’s column as “12 Timeless Tips.” 

  1. Educate yourself. Read “The Total Money Makeover: A Proven Plan for Financial Fitness” by Dave Ramsey. To learn about investing, read “Winning the Loser’s Game” by Charles D. Ellis, and “A Random Walk Down Wall Street” by Burton G Malkiel. To understand how the markets work—or don’t—read Justin Fox’s “The Myth of the Rational Market: A History of Risk, Reward, and Delusion on Wall Street.” 

  2. Pay yourself first. Start saving early. Compounding is like a money tree. If a 35-year-old were to tuck away $2,000 today and again every year till age 65 in a stock portfolio averaging 8% per year, he’ll have close to $250,000 at age 65. If he waits 10 years instead, and starts at age 45, he’ll end up with less than $100,000. Of his $150,000 shortfall, only $20,000 of it comes from his pocket. The other $130,000 comes from missed compounded earnings. 

  3. Don’t try to time the stock market. You can’t. You might get it right once in a while, but not often enough to pay off over time.
     
  4. You can’t consistently pick superior stocks. If that were possible, the thousands of financial analysts picking stocks for Wall Street firms would stay home and live lavishly off their stock-picking ability. At the very least, the firms they work for would consistently outperform the market. That happens rarely, if ever.
     
  5. Don’t believe the guy who claims to make lots of money trading stocks. Like gamblers in Vegas, he may make money at times, but he will lose it, too.  

  6. Diversify your investments. Use mutual funds to purchase stock in a broad portfolio of large companies, small companies, international companies, and emerging market companies. 

  7. Use low-cost, broad market index or index-type quantitative funds. Research repeatedly shows that most active mutual fund managers don’t beat the market. 

  8. Don’t chase short-term performance. Hot stocks today will inevitably lose their luster. Invest for the long-term instead. 

  9. Stay out of debt. Don’t buy what you can’t afford. Pay off your credit cards every month. Mortgages are okay, since you are using leverage to buy an asset that will increase in value, but make sure your mortgage is scaled properly with your ability to service the debt. 

  10. Save for college. Use 529 plans; you can’t go wrong. If your kids never need the money, you can take it back, or reassign your 529 plan to benefit someone else. 

  11. Beware of investment salespeople. There’s a difference between a broker selling you financial products and an advisor helping you make good financial decisions. If you want advice, hire a competent advisor. Get referrals and check them out. Don’t be fooled by friendly smiles, unsolicited phone calls, free lunches, and fancy advertisements. 

  12. Invest in real estate, starting with your own home. Owning your home is a great diversifier for your portfolio, and it provides a stable foundation for many other aspects of life. Of course, you need to be wise about how much home you buy. Always live within your means.  


    Please see important disclosure information here.


    Steven C. Merrell  MBA, CFP®, AIF® is a Partner at Monterey Private Wealth, Inc., an independent wealth management firm in Monterey.   He welcomes questions you may have concerning investments, taxes, retirement, or estate planning.  Send your questions to: Steve Merrell, 2340 Garden Road Suite 202, Monterey, CA  93940 or email them to smerrell@montereypw.com.