The bottom line is if you have a choice between investing your money with active fund managers or exchange-traded funds, pick the latter.
4 – Credit Card Tips: The Rule Of Two
When your information is online these days, it is at risk.
Mr. Wonderful recommends that you always have two credit cards.
When you make purchases online, use a credit card with a low limit. For other purchases, use a credit card with a higher limit.
If your online information is one day compromised by a hacker, the financial damage is contained to the smaller amount.
In both cases, he recommends you pay off the full balances on each card each month. Otherwise, interest charges as high as 20% or more can be applied to your balances, making it very hard to pay off credit card debt.
By paying off your balances each month, you also get to build up your credit history and improve your credit score, which in turn can lead to better lending rates when taking out home loans, student loans, or personal loans.
5 – Mom’s Investing Tip:Split Your Investments Evenly
In an interview with Forbes, Mr. Wonderful described his mother’s investing style, whereby she split her investments evenly between stocks and bonds.
But not just any old stocks or bonds. She selected large-cap dividend paying stocks and corporate credit.
Over a 50 year period, his Mom took 30% of her paychecks and invested half into dividend-paying stocks and half into corporate bonds.
When she passed away, her investments had grown to become a small fortune.
Moreover, Mr. Wonderful states that you can’t find any better combination of asset classes that beats the returns earned by his Mom’s portfolio.
The bottom line: split your investments evenly between corporate bonds and dividend-paying stocks.
6 – Ignore New, Flashy Stocks
When Mr. Wonderful was researching how best to invest his fortune, he says he stumbled upon an extraordinary statistic.
Over a 40 year period, 70% of the stock market’s returns came from dividends not capital appreciation.
His golden rule after learning that investing lesson is to only own dividend-paying stocks.
In his book, Stocks For The Long Run, Professor Jeremy Siegel from the Wharton School of the University of Pennsylvania notes that over an even longer stretch of time, an even higher percentage of gains stem from dividends.
The lesson according to Mr. Wonderful: avoid new, flashy stocks that just went public as well as non-dividend paying stocks.
Until companies have proven themselves over the long haul and pay dividends, they are best avoided. Otherwise, the only way to make money is when someone else buys your stock at a higher price.
7 – No Stock or Bond Should Be
More Than 5% Of A Portfolio
The first generation of exchange-traded funds were market-cap weighted, meaning when one company does really well and grows its valuation significantly it becomes an inordinately large piece of the ETF.
But Mr. Wonderful has a philosophy that no position should be more than 5% of his portfolio.
As a result, most ETFs are a poor fit for his investing style. Instead, he says an equal weighted index is a better bet to reduce overall portfolio volatility and potentially risk.
Rather than one egg dominating the basket, your investments will be split more evenly across many holdings.
This article has been republished with permission from Investor Mint.