1. Always keep a percent equal to your age safe. Each year, you get a year older. By protecting a percent equal to your age, you ensure that by the time you are set to retire, your income is stable. During recessions, overweight more safe. During bull markets, you might want to put a small percentage more into the hottest industries.
2. Know what is safe. Bonds are traditionally safer than stocks, but they are not safe in today’s high debt, rising interest rate marketplace. So, you have to pick bonds judicially and also select shorter terms, in order to be most safe. FDIC insured money market accounts are safer than bonds this year and cash positive hard assets (like rental income property) that are purchased for a song might be an even better choice.
3. Diversify into 10 funds, 6 by size and style and 4 hot industries. By having small, medium and large, as well as value and growth stocks, you are ensured of providing stability and performance to your nest egg, as well as buying the value stocks at a good price. Jabba the Hutt companies, like $300 billion Apple and $83 billion Amazon are not likely to go out of business tomorrow, while the nanotech companies that are doubling revenue can also double their share price. Gold was hot during the Great Recession and helped to add gains. Clean energy was the top performing industry in 2007 and could be again in 2011. NASDAQ doubled the Dow in 2009. Australia and Latin America — countries that are rich in natural resources — have led the world in stock gains over the last few years. So, add some heat – some hot industries — to spice up your returns.
4. Avoid the bailouts. Most investors know the Dow Jones Industrial Average as the leading blue chip index. Few know that AIG, General Motors, Citigroup, Bank of America, American Express, Philip Morris, JP Morgan Chase and General Electric, all companies that received bailouts and subsidies from the government, have been components of the 30-company DJIA index. That is why I’ve renamed it the Bailout Index and advise against blind faith investing here. Your broker may say otherwise, because the brokerage pushes these companies and/or because s/he is paid high commissions to sell you these stocks.
5. Rebalance annually. Annual rebalancing achieves the age-old success formula of investing – buy low and sell high. If you are still using the old Buy and Hold strategy, then you are holding losses, since NASDAQ is still 44% lower than its 5000 high and the Dow is still off by 3%.
With annual rebalancing, you are assured of capturing gains near the highs. Also, during recessions, when stocks will lose value, you will be buying low to beef up the slices of your pie chart that have slimmed down too much. In that way, annual rebalancing is an easy way to buy low and sell high in your nest egg.