In the Preface of this 7-part series of blogs, I explained that my daddy was always a salaried employee, yet by following seven rules he went from being recently out of college to a millionaire-plus twenty-five years later. My mom never worked, and they fully-funded the education of their two sons. He passed away in 1980.
I suggested that with the 2010 New Year ready to begin, this would be the perfect time for each of us to initiate Daddy's 7 Rules for Securing Your Financial Future.
Here, stated again, are the rules:
- Save at least 10% of your gross income
- Know about, understand, and use the principal of Dollar Cost Averaging
- Intellectually know that you don't have a profit or a loss in an investment until you sell it.
- Secure your family's well-being and your retirement income stream with life insurance annuities
- Pay off the mortgage on your home as quickly as you can
- Accumulate a portfolio of income producing real estate
HERE IS NO. 7, THE FINAL INSTALLMENT:
Of course to diversify means to not put all of your eggs in one basket. In financial planning, it means to spread your savings among several categories - CDs, listed stocks, mutual funds, real estate, and the like.
In fact, it even implies to take that diversification one step further. If you're buying rent houses, for an example, don't buy all of the property in the same neighborhood.
But to diversify has one other meaning, perhaps the most important one, one that is frequently overlooked or not given its proper weight in the equation. It means to make every effort to place your investments so that if you need to dip into your savings, you'll have a choice of where to get it.
When I was traveling as a solo pianist playing in hotels a long time ago, I was able to save a substantial part of my income. My family's longtime stock broker, Don Frye, suggested that I buy shares of El Paso Natural Gas with it, so I did. What I began to notice was that the stock sold in the $20 or so range in the summer and in the $30 or so range in the winter. Obviously that had to do with their sale of gas.
So I made the future investments in the summers.
A few years later I went back to graduate school, and I paid my way by divesting shares of the El Paso Natural Gas stock. The good news was that when I needed money, it was when the shares would be historically up.
But what if it had been the other way around? What if I had had to sell in the summer months when the stock would be historically down?
You get the point. Do your best to make certain that you won't be trapped into having to liquidate all or part of an investment when it is not to your financial advantage to do so.
And that's why it's important to have your income-base in investments that are secure, that are dependable and that are not cyclical. That's the reason for annuities, coupon bonds, your retirement account, and the like.
The funds that are to provide the extras and be there for unexpected expenses need to be diversified. They're the ones that also are for the purpose of hedging inflation, the ones you can tap if the buying power of your income-base investments start to diminish.
BILL CHERRY, REALTORS
DALLAS - HIGHLAND PARK
Our 45th Year