Here’s the easiest investment advice you’ll ever get: Figure out all the ways to screw up your retirement — and then don’t do those things.
It’s a strategy used by investing legend Charlie Munger, who counsels you to “invert, always invert.” In other words, find out how to sabotage your success, and then avoid those methods at all costs.
Munger cribbed this idea of solving a problem by working backward from the work of mathematician Carl Jacobi. And together with his super-investor pal Warren Buffett, it’s a strategy Munger applies to growing Berkshire Hathaway, one of the world’s largest and most successful companies.
For example, what they choose not to buy is just as important as the investments they make. So, following Munger’s advice, don’t do the following things.
Don’t speculate with your nest egg
One of the best ways to destroy your retirement is by buying speculative investments in your individual retirement account (IRA).
Speculative investments appeal to our “get-rich-quick” mentality. They’re much like a jackpot lottery: Sure, someone strikes the mother lode, but virtually everyone loses. Similarly, investing in speculative investments in your IRA will likely leave your retirement years not so golden.
So what are some examples of speculative investments?
- Penny stocks: Avoid the stocks of companies that lose money and have no prospect of ever earning any. You’ll find a lot of these speculations among low-priced, highly volatile “penny stocks,” which is why that sector of the market has a terrible reputation.
- Bitcoin and other cryptocurrencies: Also near the top of the speculative list is bitcoin. Buying bitcoin in an IRA is a huge no-no. Unlike a well-managed company, bitcoin doesn’t generate cash — and neither does any other currency, real or virtual. That’s why they’re speculations.
- Gold and oil: Steer clear of commodities such as gold and oil. They’re highly volatile assets, and most importantly, they don’t produce cash flow.
- “The next big thing”: When salespeople urge you to get in right away, rather than allowing you to carefully consider your investment options, and promise the investment will go up many times in value because it’s “the next big thing,” that’s a red flag. If — when — these investments don’t fulfill that promise, they will tumble, usually making your investment worthless.
Don’t trash your tax advantages
If you’re investing in an IRA, you want to use the account's huge tax advantages to your advantage and ride your IRA to a pleasant retirement by avoiding speculations.
Here’s one more way you lose if you buy speculative investments. It’s much easier to write off a capital loss in a taxable account than in an IRA. To deduct a loss in an IRA, you’ll end up destroying the IRA and its key benefit, tax-advantaged growth. Instead, save your best investments for your IRA and then let them compound for years and years.
Don’t play it too safe
If you’re keeping all your retirement money in CDs or bonds and avoiding investing in stocks altogether, you’re making the opposite mistake from speculation by being too conservative for your own good. Your returns will be too modest to help you build a retirement cushion.
That’s because “safe” investments such as CDs and bonds don’t outpace inflation significantly over time, and inflation is taking a bite out of your purchasing power every year. In contrast, a plain vanilla index fund, such as the Standard & Poor’s 500, has generated 10% average annual returns for decades, enough to maintain and even grow your purchasing power.
Instead, invest for long-term growth
Munger, along with Buffett, recommends buying well-managed, profit-generating companies. Over time, these companies generate more and more profit, so their stocks go up in the long run. Yes, sometimes they do go down, but over time, they’ve marched higher. Think long-term growth, not short-term gambling with speculations.
Don’t know which companies to buy? No problem. You can own some of the best. Buy a fund based on the S&P 500 index of top American companies. It’s a low-risk option — and this kind of fund has been recommended for years by investing savants Munger and Buffett.
James F. Royal, Ph.D., is a writer at NerdWallet, a personal finance website. Email: firstname.lastname@example.org. Twitter: @JimRoyalPhD. NerdWallet is a USA TODAY content partner providing general news, commentary and coverage from around the Web. Its content is produced independently of USA TODAY.
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