Thursday, February 28, 2008

Title: The Random Walk Guide to Investing
Author: Burton G. Malkiel
Bookmark: Scrap paper on which to jot down useful info from the book.

I am on a huge personal finance kick these days. I finally have a decent amount of extra income left over after bills and such, so I decided I need to do something with it. This book was highly recommended by a number of blogs I read, so I thought I'd give it a try. Boy, was it worth it!

Malkiel is a Professor of Economics at Princeton, so I suspect he really knows his stuff. Luckily, this book is written for the beginner, and is dumbed down enough that I can understand it.

He starts off with an explanation of different investment options - cash, stocks, bonds, and real estate. Then he enumerates his 10 rules:

1. Start saving now, not later. This one is by far the most important. Compound interest favors the young. Some of the blogs I've read have crunched the numbers and the difference between saving now and saving later is alarming. Here's a good and realistic example.

2. Save regularly. Keep on a consistent savings path. Even if you can only put away a little a month, do it EVERY month. One of the best ways to do this is to pay yourself first. Have a certain percentage of your paycheck automatically put into some sort of savings - retirement, investing, whatever. Put it away before you can get your paws on it.

3. Have an emergency fund and insurance. Create an fund for the emergencies that will inevitably arise. It needs to be some place where you can access it quickly - money-market mutual fund, CD, internet bank (like ING direct, which I am using), etc.

4. Find tax-advantaged options. Traditional IRAs allow you to deposit money pre-tax and pay tax in retirement when you withdraw. Take advantage of your employers pension plans (401k, 403b, etc)

5. Allocate your assets according to: time before you will withdraw (the shorter the time, the less you should have in stocks and the more in cash or other), your financial circumstances (how much you have leftover after meeting your standard of living), and your temperament (don't create a risky portfolio if you aren't a risk-taker).

6. Diversify your portfolio: More diversification = less risk. When one stock plummets, you still have others doing just fine. Also diversify by investing over time. This helps you avoid putting a ton of money into the market right before stocks plummet (like I did in May of 2000. Well, it wasn't a ton of money, but it was still money!).

7. Pay yourself, not others: Pay off your high interest debt, find mutual funds with low expense ratios, etc.

8. Recognize that no one can predict the stock market. You are far far better off finding a low expense mutual fund than trying to follow some "expert" who picks the "top stocks." Previous performance is not a predictor of future performance.

9. Invest in index funds. They are simple, cost-efficient, predictable, and don't generate a lot of taxable gains. Find a Total Stock Market fund - one that "buys and holds virtually all the stocks in the market" (p. 139).

10. Avoid: Being overconfident about your investing skills, jumping on "hot tips", feeling like you have control over your investing and can predict the market, and more.

All in all, an absolutely fantastic intro to investing. Everything is explained clearly, it's short and a quick read (only about 180 pages), and I now have a much better sense of what I should be working towards.

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posted by Kate at 8:58 AM


Blogger Megan said...

Hey Kat - as a poor student I'm not really in the investing market (yet) but my parents have been quite pleased using internet sites (like Scott Trade) to access European stocks and CDs. With the dollar tanking and the euro, well, not, you can work the exchange rate to your advantage.

2/28/2008 11:49 AM  
Blogger Elizabeth said...

The Federal government rocks. They'll match up to 5% of the funds you put into the Fed equivalent of a "401k". So for taking 5% out of your salary, you actually save 10%.

I've been sporadically reading "Personal Finance for Dummies." Its informative, but I really can't act on any of its investing advice at the moment, other than SAVE, SAVE, SAVE! Stupid loans.

3/01/2008 12:08 PM  

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