7 Rules For Amassing Wealth

1. Start early

More than any one stock or mutual fund pick, the age you start investing will determine how much wealth you build. To illustrate: Employee A starts putting away $100 a month when she’s 22. Her money grows at 8 percent a year, and after ten years she stops contributing – and lets her stake grow. Employee B waits until he’s 32 to set aside $100 a month, also growing at 8 percent a year, and he keeps it up until he hits 64. When they both retire at 64, she will have $234,600, and he’ll have only $177,400. Need we say more?

2. Use your 401(k)

If you’re not already enrolled in your company’s plan, stop reading now and sign up. Since you’re putting in pretax dollars, a 401(k) is an unrivaled savings vehicle, and passing up an employer match is – literally – giving up free money. Confused about how to manage all the choices in your 401(k) plan? New pension legislation is encouraging companies to offer third-party investment advisory services, so call HR to find out if yours offers any on-the-house guidance.

3. Keep it simple

If you have a full-time job and it’s not picking stocks, acknowledge that. Choosing three or four index funds – say, an S&P 500 fund, an EAFE fund, and a small-cap stock fund – will give you broad exposure. ETFs (low-cost mutual funds that trade like stocks) are also an easy way to invest in more exotic asset classes, like commodities. If you’re close to retirement, consider life-cycle funds from Vanguard or T. Rowe Price, which will automatically rebalance your account according to your goals.

4. Don’t try to beat the market

Even the best fund managers have trouble beating the S&P 500, so give up the chase. The most straightforward way to avoid this trap is to diversify your assets and then rebalance your portfolio at least once a year. Check your asset breakdown with Morningstar’s free Instant X-Ray tool (www.morningstar.com). Essentially, rebalancing means selling some winners that are taking up too big a share of your portfolio and redeploying that cash to bulk up in areas that have lagged. (Buy low, sell high – get it?)

5. Don’t chase trends

You want to grow your money for the long haul, so you can’t switch your strategy every time you read the headlines. If you see an asset class that’s catching fire – like real estate investment trusts (REITs) in the late ’90s or commodities this year – ask yourself some basic questions: Can I describe how it works in plain English? If not, start your research at Investopedia.com. Why is it so popular right now? If the answer is “Paris Hilton bought some,” best to stay away.

6. Make saving automatic

No one wants to think about saving – so don’t. Already more companies are making 401(k) enrollment automatic (34 percent of big companies, vs. virtually none ten years ago). If you’re already maxing out your 401(k), see whether your company can transfer money directly from your paycheck into your Roth IRA or a taxable account. Or ask if your bank can transfer a set amount (even $100 a month) from your checking account into a high-interest-bearing online savings account (check out HSBC’s and ING’s offerings).

7. Go heavy on stocks

The more time you have, the more risk you should take. If you’re just starting out, 80 percent to 100 percent of your assets ought to be in stocks. The simplest trick? Subtract your age from 120: That’s the percentage you should have in stocks; the rest should be in bonds. “If you have, say, 30 or 40 years, what happens over the next three months or even three years doesn’t matter. If you need the money in two years and it drops 40 percent in one year, that’s a problem,” says Stuart Ritter, a certified financial planner with T. Rowe Price.