4 Rules For A Rock-Solid Retirement Portfolio

There is no one-size-fits-all formula for retirement investing, but these rules apply to pretty much every situation.

Mar 29, 2014 at 1:00PM

Source: 401(k) 2012

When investing for retirement, many investors are unsure of what type of stocks to buy. Should income be the primary objective? Do growth stocks have a place in a retirement account? Shouldn't most of your money be in bonds, anyway? There is all kinds of advice to be found regarding retirement accounts, but there are a few really easy principles that can help you know what's good for your account and what's not.

Will it be needed in 100 years?
This is one of the things Warren Buffett likes to say about his portfolio, and he emphasized this point in a recent letter to Berkshire Hathaway's (NYSE:BRK-A) shareholders. This is one of the easiest principles to understand, but far too few investors use this in their portfolio.

Take a look at Berkshire's holdings. They include businesses that sell insurance, food and beverage, clothing, furniture, construction and materials companies, media companies, jewelry stores, and banks. The way they do business will certainly evolve, but it would be tough to make the case that any of these businesses will be obsolete in 100 years.

On the other hand, will people in the year 2114 need the types of products that Apple or Google produces? Maybe, but maybe not. It's impossible to know for sure. Will people still smoke cigarettes in 100 years? Tobacco companies might not be the best long-term investment. However, people are still going to need to insure their possessions, eat dinner, put on clothes, build homes, and will still need banking services.

Ask yourself this question with every stock you consider for your retirement portfolio. It may change the way you look at things.

Stock/Bond mix? Does it matter?
I've heard all kinds of answers to this question, and the most popular is the "age" ratio. This basically tells you to convert your age to a percent and that's how much you should have in bonds. In other words, a 50 year old man should have 50% of his money in bonds. I wholeheartedly disagree with this rule.

You can certainly have most of your money in stocks, but more important than the allocation itself is that you manage risk correctly. It is a common misconception that stocks are inherently risky and that bonds are inherently safe. As long as your holdings are safe and diversified, it is completely fine to add 20-30% to that figure (or 70-80% stocks for a 50 year old).

It's all about dividends, right?
The short answer is yes, but while it is important for the stocks in your retirement portfolio to pay dividends, it's even more important the company has a good track record of increasing shareholder value and raising its dividend. While past performance is not a perfect indicator of future results, it is definitely useful in deciding which companies are most likely to give you a growing income stream over time.

The website dividend.com publishes a list of all stocks that have raised their dividend every year for at least 25 years, and most of the longest-running companies on this list fit the "100-year" criteria mentioned earlier. For example, the stock on the list with the longest streak of dividend raises (60 consecutive years) is Diebold (NYSE:DBD), which has provided services to the financial industry since 1859. Sure, their products have evolved from safes and vaults to ATMs and electronic security products, but there will always be a need to keep consumers' money safe.

Invest early and invest often
Once you are satisfied the company you want to buy meets the requirements of the 100-year test, and you are confident the company will provide you with a growing income stream for years to come, the best thing you can do is to get started as soon as possible. Time is the most powerful in an investor's arsenal, and it is what allowed Buffett to build his massive fortune.

Albert Einstein once called compounding "the greatest mathematical discovery of all time." Allowing your dividends to compound over time is one of the most certain paths to wealth in the world.

Nine great dividend stocks to get you started
One of the dirty secrets that few finance professionals will openly admit is the fact that dividend stocks as a group handily outperform their non-dividend paying brethren. The reasons for this are too numerous to list here, but you can rest assured that it's true. However, knowing this is only half the battle. The other half is identifying which dividend stocks in particular are the best. With this in mind, our top analysts put together a free list of nine high-yielding stocks that should be in every income investor's portfolio. To learn the identity of these stocks instantly and for free, all you have to do is click here now.

Matthew Frankel has no position in any stocks mentioned. The Motley Fool recommends Berkshire Hathaway. The Motley Fool owns shares of Berkshire Hathaway. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.


Compare Brokers