Rule #8 of Investing

Put off paying taxes until a later date is Rule #8. Permit your savings to grow tax deferred through your working life. If your employer will match savings in a 401 (k) or 403 (b) plan, do not leave any dollars on the table. For every dollar placed in a savings account, match that amount with every dollar you can muster. It is amazing how many workers do not take advantage of retirement plans set up by their employer. To not participate to the fullest extent is like turning down free money.

Next, max out your IRA contributions each year. Now is also a good time to invest in a Roth IRA and here is the logic. Pay your taxes on Roth money now as there is a high probability taxes will be higher in the future. For this reason, I recommend first setting up a Roth IRA before establishing a standard IRA. Use IRA plans to their maximum and delay tax liabilities. While we never know what taxes will be in the future, I still think it is good practice to have money taken out of the paycheck now, thus lowering taxable income. Learn to live on less income and save more. If one is saving in no-load mutual funds, select index funds from Vanguard if possible. Reinvest all dividends and capital gains so as to remain fully invested in stocks and bonds.

To review a few critical points, we now have a savings plan in effect. We know the importance of asset allocation and our discipline requires us to hold down expenses. In almost all situations we have fired our financial advisor and we have cut loose the “full-service” broker. We have set up accounts with a discount broker. We know the term “full-service” broker is a red flag for ripping off the consumer. Commissions are now below $10 per transaction. A portfolio plan (Strategic Asset Allocation plan) is in effect or close to completion. The ETFs have been selected for populating the portfolio. Gold subscribers have several examples available. Some investors will be using index mutual funds for their investing vehicles. It is time to visit the office of Human Resources and make sure the 401 (k) or 403 (b) plan is operational. Max out employer contributions. You are ready to learn how to maintain and monitor the portfolio.

ITA Ratio Video/Audio Clip

Here is another help session for users of the TLH spreadsheet.  This clip provides additional explanation of how to introduce the ITA Ratio, a new performance bar for index portfolios.

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