PaulA. Merriman

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I have many friends who seem to have little trouble maintaining their proper weight and staying in shape. I envy them, for I have struggled for many years with weight and my need to develop healthy habits.

What does this have to do with investing and retirement?

In almost every case, my successful friends seem to have done two important things. First, they have adopted a set of simple dietary rules for themselves (and they have followed them). Second, they have set up their lives so that exercise is just part of a normal day.

These people seem to live by a relatively short list of do’s and don’ts. I believe retirees can do the same, and naturally my thoughts turn to financial matters.

What follows is a simple list of do’s and don’ts that can help all of us achieve three things I believe we care about quite a bit: More money, less risk, and more peace of mind.

I believe each item on this list puts the odds of success squarely in your corner. Each one will help you attain your goals with a high probability of success.

Let’s start on a positive note with five things retirees should do.

Retirement do’s

• Do take advantage of “the only free lunch on Wall Street” by building a diversified portfolio of mutual funds. This will reduce your risk and probably increase your returns.
• Do buy funds with the lowest possible expenses. The average equity fund charges more than 1.3% a year, yet you can get most of the asset classes you need in good funds for a full percentage point less than that. This is equally important for bond funds.
• Do buy index funds instead of actively managed ones. This will be a big help in achieving both of the prior “do’s” I mentioned.
• Do invest in equity asset classes with long histories of successful returns. Based on years of careful study by academics I trust, this means U.S. large-cap blend, U.S. large-cap value, U.S. small-cap, U.S. small-cap value, international large-cap blend, international large-cap value, international small-cap blend, international small-cap value, and emerging markets. And for tax-deferred accounts only, it means U.S. REITs.
• Do invest in the most tax-efficient manner. Unless you have unusual circumstances, that means maximizing your IRA and 401(k) accounts and (when you’re living off your money in retirement) using up your taxable accounts first.

OK, let’s look at some things you should not do. These might seem pretty obvious. But I have talked to many people who do each one of them.

Retirement don’ts

• Don’t pay a sales commission to buy or sell a mutual fund. The commission is money that’s gone forever from your nest egg, and it inevitably and permanently diminishes the return you will get.
• Don’t buy funds in asset classes with low expected returns or high levels of risk relative to their expected returns. Among the most prominent examples of asset classes you should avoid are commodities, gold and technology stocks. In addition, I think you should steer clear of pure growth funds, whether they invest in large-cap, midcap or small-cap stocks — and this includes international funds as well as U.S. funds.
• No matter how much you are attracted to an active manager, don’t buy actively managed funds. This is really another way of stating my third point above. Actively managed funds are guaranteed to have higher expenses than index funds, and their returns aren’t likely to be as high as those of index funds.
• Don’t speculate with your portfolio, even a small part of it “for fun.” If you have a properly diversified portfolio along the lines that I recommend, your investments will include all the “great opportunities” you will ever need. Speculating and playing the market will almost surely reduce your long-term returns.

If you absolutely can’t resist trying your luck, then spend (notice I am not saying “invest”) a bit of money that you can afford to lose and buy a lottery ticket.

I always enjoy learning from my readers. If you have adopted simple rules that have helped change your financial life, please let me know about it.

Richard Buck contributed to this article.