Powerful Investing Basics

Jan. 27--Your financial planning and investment management often require solutions unique to you. Several key tenets of personal finance require no customizing, though. If you can follow these principles, you enjoy a better chance of financial security.

Understand your financial goal and work backward to define how much planning, money and time you need to achieve it. Figuring out where you want to be makes for a better route than letting whatever money you end up with determine how you live then.

The more you save, the less you rely on investment returns for the heavy lifting of your goals and finances. Save 10% of your income over a 40-year working lifetime and even moderate investment returns without extraordinary risk might make you a millionaire.

Never pass up an employer match to your retirement plan. According to Financial Engines, the average employee misses out on more than $1,300 in matching contributions per year.

Investing early -- providing the opportunity for more years of compounding growth -- means more than investing larger sums later. For example, if you invest $5,000 per year from age 25 to 65 ($200,000) at 5% returns you actually accumulate more than someone who invests $18,000 annually from 45 to 65 ($360,000) with the same return.

In investing, consistently outperforming a market benchmark is hard -- especially if you compare your investments to the wrong benchmark. Strong performance from certain segments of the global stock and bond markets will be spotty. The only truly relevant benchmark for your investments: whether you feel they help you progress toward your long-term goals.

Also, average returns rarely appear. Prepare for an investment experience far different from what any historical guide conveys.

For instance, I track a balanced portfolio of 60% global stocks and 40% bonds. Since 1973, this allocation produced a 10.4% average annual return, and only seven of those 42 calendar years saw overall market returns within even two percentage points of this long-term average.

The investment best for you isn't necessarily the one with top performance over the past year but the asset you can stick with for many years. Trying to time changes in investment opportunities will only make your pursuit of financial security more difficult.

Speaking of which, don't start Social Security at age 62 unless you are in poor health or unable to work and absolutely need the money. Postponing your benefits earns you Delayed Retirement Credits for each year you wait, ranging from a 5.5% increase in your eventual benefits per year of delay if you were born in 1933 or 1934 to a 7.5% yearly increase if you were born in 1941 or 1942. Your future benefits also receive cost-of-living adjustments based on the higher earned benefits (1.7% this year).

Among other tips:

* Being underinsured can be a quick route to hardship. Adequate life, disability and health coverage underpins financial security, especially early in your career and if your dependents rely on your income.

* Whether you give $20 or $20,000, donating to a cause you care about makes you feel good. Keep philanthropic happiness a component of your financial plan.

* Make lifestyle and finance decisions as if you run a profitable business for your family. Live below your means and put the profits to good use and things you value.

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Gary Brooks is a certified financial planner and the president of Brooks, Hughes & Jones, and a registered investment adviser in Tacoma, Wash. Find risk tolerance resources at his blog The Money Architects, where an expanded version of this piece first ran.

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