investing

12 essential investing tips for 2012

Dr. Don TaylorThis is my 13th year of writing "top 10" investing tips to get you thinking about changes you can make to your finances for the coming year. As always, I wish you a healthy and prosperous new year.

Tip 1Work on your life goals

Financial planners have embraced the idea of helping people identify their life goals and help their clients achieve them.

Money can be the means to an end or a way to keep score, but it makes for a lousy proxy for measuring what you're getting out of life. When you know what you're working toward, you'll be more committed to investing for those goals.

Identifying your life goals is so much more than just a bucket list, but that list could be part of the package, too.

What do you want to accomplish while on this earth? What do you need to get it done? Revise, re-evaluate and resubmit your plan as necessary, but don't let the pursuit of wealth be the goal.

Tip 2Know where the money goes

You can do one of two things with your income -- spend it now or save it for later. Economists call it the consumption/investment decision. If you consistently spend more than you make, you aren't putting anything toward your goals. Put together a spending plan for your income, and stick to that plan.

I like to call it a spending plan rather than a budget because budgeting, like dieting, is a chore, while a spending plan has you choosing how to allocate your income.

Keep track of your spending. Whether it's with an app on your smartphone or on a scrap of paper you keep in your wallet, track your spending to see if your spending plan matches your spending reality.

Tip 3Spend less than you make

This is easy to say, and it's not so easy to do. A commitment to living within your means is a first step toward working toward the future. When you finance current consumption with credit, you're reducing future spending by that expense plus interest.

If you have a big credit hangover, you'll have to take your medicine and get out from under your past spending, too. Deleveraging is all the rage for banks, countries and consumers. It just means there's less debt in the mix. Debt restructuring can free up some money in the monthly spending plan, but it doesn't pay off debt. It just changes the terms. Don't make that decision lightly, especially if you're considering a cash-out refinancing of your mortgage to pay off your credit cards. And don't run up the card balances all over again.

Tip 4Maximize your employer's matching contributions

For employers who make matching contributions to their employees' retirement plans, it's common for them to match 50 cents per dollar that you contribute up to a cap. The cap is typically 3 percent for the employer's contribution if the employee contributes 6 percent of his salary.

What's not to like about making 50 percent on your money before you even decide how to invest it?

Many of us aren't saving enough for retirement. Turning down a helping hand from our employer doesn't make sense. Start building a retirement war chest. You're going to need it.

Tip 5Build an emergency fund

Keeping some money in reserve for financial emergencies is a sound practice. For most people, it's where they should start investing. An emergency fund is a pool of money typically invested in liquid investments, meaning the investments can be converted to cash without penalty or reducing principal.

A common rule of thumb is to have three to six months' worth of living expenses available in your fund.

Tip 6Expand your approved list

The current trend in retail investing is for investors to have an investment-policy statement developed with their investment adviser. More comprehensive than a brokerage agreement, it spells out the investor's goals and objectives, asset allocations, liquidity requirements, risk tolerance, etc., and how the investment adviser will work to meet those objectives.

You may not have a policy statement in place, but your portfolio is invested in some combination of investments. I'm suggesting that you look at how you're invested and consider expanding the number of asset classes held in your portfolio. Go beyond the normal division of stocks, bonds and cash, and dig a little deeper. If your portfolio is U.S. centric, consider adding an international component. Divide that international component between developed and emerging market economies and look at both bonds and stocks. Get professional help as needed, which may include professionally managed mutual funds.

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