Rule Number 1: Always keep your family financially secure

Intro

I've been trying different types of investments for 9 years now. I've had a few things go right and a lot of things go really, really wrong. I'm going to slowly add things that I think I've learned over that time in the next few days (or weeks). It's sort of an open letter to my son as well, so some of it will seem personalized. Let me know if I'm really far off on any of it...

Rule Number 1: Always keep your family financially secure

You need to be prepared for any events that happen. Don't go along thinking life will be spent drinking champagne at cotillions and deciding whether to take the Bentley or Rolls Royce. It won't. Bad things happen, and they can (and will) happen to you.

On top of that, when things go bad, it's almost never a situation in which it a good time to divest assets. For instance, if you lost your job, the job market will likely be atrocious.

Why is that, you ask?

It probably means that your industry (and likely entire economy) is in a downturn. You will be stuck trying to find a job in a very tough job market, and your company won't give you much more than 6 weeks severance because they can't afford to. If the economy is suffering, then the stock market and real estate markets are suffering because people are buying less stuff and have less salary to buy new homes. That means that if you've been buying and holding stocks, you now have to sell your assets at the worst possible time. If you are holding real estate, that portfolio has also dropped, and you will have to sell into a buyers market. If you don't have a lot of equity already, you may end up taking a loss on your investments just to have cash to eat.

Knowing that, you need to have at least 1 years living expense for you and your family in your savings account and CDs before making any other investments. I'm not talking about 1 year of normal life, but a years worth of tough, eating ramen noodles every day while searching for a job money.

Another thing I want to share may seem counter intuitive.

"The richer you become, the less money (as a proportion) that you should have in high risk assets like the stock market."

Starting from nothing and being 31, I'm 85% invested in risky assets for two reasons:
1. I'm not really risking the stability of my life, because I'm a well paid slave anyway.
2. Unless I am fully invested, then I'm not really making any money anyway. (10% of 50,000 is only $5,000)

As I age, however, I'll scale that back tremendously. As I approach retirement and the kid's college years, I'll go into safe assets to ensure that I hold on to the money to pay for them.

If you are successful enough to get rich, you've taken all of the risk necessary to achieve your goal. You can get rates that beat inflation on a money market account if you have a large enough amount of capital. Preserve your capital safely and continue to run your business or whatever vehicle has made your rich. At that point, real estate investing or investing in the stock market are simply bonuses, and they should probably only be 20-30% of your portfolio. If those areas happen to be your business, keep your personal exposure low and use other people's money to continue to finance your real estate or stock transactions.

Finally, I want to point out that keeping your family secure means keeping the money under your watchful eye. Hedge funds for super wealthy and similar structured vehicles are all cons. Most of the hedge fund managers can't beat the S&P. If that's true, then you're better off being in SPY. You can sell it when you want, and you don't have to worry about being ripped off or incurring a high tax bill as they churn stocks. It's not about what the in crowd is doing, but getting and maintaining wealth. The best person to do that is YOU!