Your Money_ The Missing Manual - J. D. Roth [138]
You can sell enough of your winners and buy enough of your losers to bring things back into balance. By selling the investments that have grown and buying those that lag behind, you're following the Wall Street mantra to "buy low, sell high." Be aware, though, that you might owe taxes if you go this route, so check out the tax implications before you sell any securities.
If you can afford it, contribute new money to your investment account, but only to buy the assets that need to catch up. For instance, if you only have 34% in bonds instead of your target 40%, add more bonds to bring your portfolio back into balance. By doing this, you don't have to worry about taxes, but you will need some cash on hand.
Though many investment professionals swear by rebalancing, some research shows that it's not as important as people once thought. In The Little Book of Common Sense Investing, John Bogle writes, "Rebalancing is a personal choice, not a choice that statistics can validate. There's nothing the matter with doing it…but also no reason to slavishly worry about small changes…" In other words, rebalance if your asset allocation is way out of line but don't worry about small changes—especially if you'd end up paying a lot of fees by rebalancing.
Action beats inaction
Investing doesn't have to be scary. Stick with the basics you learned in this chapter: Start with an index-fund portfolio. Do your research (you can find a list of recommended reading on this book's Missing CD page at www.missingmanuals.com). As you have the time and education, make adjustments that fit your style and view of the market. Move slowly. Ignore the Wall Street hype machine. Use common sense and don't take unnecessary risks. For 99% of folks reading this book, systematic investments in index funds are the way to go.
Though I've pitched index funds as a great place to start, they're also a great place to finish. Many smart investors make index funds the core of their portfolios and never worry about anything else. In other words, they're not a dumbed-down investment that you have to abandon for something more complicated—you can stick with index funds for the rest of your life and still get great returns.
Ultimately, the most important thing isn't how you invest, but that you do invest. When you're just starting out, your contributions have a bigger impact on your success than any other factor. So make a commitment to your future self: Get off the couch and set up a retirement account today. It's easy—the next chapter shows you how.
Tip
Want to learn more about investing? Pick up a copy of Bonnie Biafore's Personal Investing: The Missing Manual.
Chapter 13. Retirement: The Final Frontier
"Doing the garden, digging the weeds—who could ask for more? Will you still need me, will you still feed me, when I'm sixty-four?"
—The Beatles
We all know we should save for retirement, but even those of us who are saving find the subject a little mystifying: How much should we save? For how long? And just where should we put our money?
You can spend a lot of time looking for the best options—or you can just get to work, reminding yourself that the sooner you start saving, the better. Besides, "best" is a moving target; what's best today may not be best tomorrow.
This chapter will help you sort things out. You'll learn some ways to estimate how much you need to save for retirement, and find out where to put your savings so it can grow as much as possible. You'll also get a glimpse at the pros and cons of early retirement.
What Will Retirement Look Like?
Retirement means different things to different people. To you, it may mean a house on the lake with plenty of time to garden. To your best friend, it may mean the chance to travel the world or golf every day. Just as we each have different careers, we'll have different experiences once we stop working and move on to other things. (In fact,