Playing it safe with your fortune
- Alan Lavine and Gail Liberman
Regardless of how much or how little you know about your money, there are some simple rules of thumb to help bring you up to speed.
Once you understand some of these, you, at least, should be able to talk comfortably with your adviser and figure out how well he or she is doing.
The first rule is to stick with high-quality stock and bond investments. Don't bet the ranch on hot stocks or buy high-yield bonds issued by companies with poor credit ratings--unless it's with money you don't mind losing.
Spread your risks. Don't put all your eggs in one basket. Keep money in stocks, bonds, cash and inflation hedges, like gold or real estate.
Monitor investments monthly or quarterly. If your financial condition or economic conditions change, make adjustments.
Invest to beat the taxman. If you're paying Uncle Sam through the kazoo, consider tax-free municipal bonds. On the stock side, offset your losses with gains. Consider investing as much as possible in tax-deferred or tax-free retirement accounts.
Unusually high rates generally mean unusually high risk. Don't swallow the bait unless it's with money you don't mind losing.
High yields on bonds are particularly deceiving. Reason: When interest rates rise, bond prices fall if you need to sell them. So if you invest in a bond with an attractive rate, expect the value of your bond to drop if rates head up and vice versa. Not selling or trading your bond? In that case, you needn't worry--unless the issuer goes out of business or "calls" the bond. If a bond is called, the issuer returns your money, typically forcing you to reinvest at lower rates.
Don't be fooled by bond ratings, which can be misleading. A "B" rating, unlike when you were in school, does not mean you've made the honor roll. In fact, corporate bond ratings below BBB and Bbb by Standard & Poor's and Moody's, respectively, are downright risky.
By contrast, corporate bonds and municipal bonds rated AAA by Standard & Poor's and Aaa by Moody's are issued by the financially strongest corporations.
Insured municipal bonds generally are backed by the American Municipal Bond Assurance Corp. (AMBAC) or the Municipal Bond Insurance Association (MBIA), two large municipal bond insurance companies.
The lowest-risk fixed annuities are offered by insurance companies, rated A+ and A++ by A.M. Best and AAA by Standard & Poor's.
Inflation, like we have today, can be traumatic--particularly if you don't know how to handle it, and you happen to own bonds.
Even though you see their values dropping, don't panic.
Instead, consider some simple solutions: If you have a little extra cash, consider socking some into precious metals or gold. These investments are risky, but they typically do well with inflation. Start shopping for higher rates on U.S. Treasury bonds, savings bonds and bank deposits.
Consider a money market mutual fund. Interest rates rise with inflation. Because money funds invest short term, you should earn higher rates with little risk. Bank savings accounts and CDs also are getting more attractive as rates rise.
A few other tricks of the trade:
For a ballpark idea of how much to invest in stocks, subtract your age from 100. The result is how much you should have in stocks, with the rest in less risky investments. Say you're 40 years-old, consider keeping about 60 percent of your money in stocks or stock-related investments, like mutual funds or exchange traded funds. Are you 70 years old? In that case, keep about 30 percent in stock-related investments.
The rule of 72 can tell how long it will take to double your money. Simply divide your investment's rate of return into 72 for your answer. Example: If your investment earns 10 percent, it will take 7.2 years to double your money.
How to tell if the stock market is performing well? Historically, the return on stocks should be 7 percentage points higher than the yield on U.S. Treasury bills.
At this writing, stocks, based on the S&P 500 index, were up .55 percent year-to-date, while the total return on the three-month T-bill was up 2.53 percent over the same period.
So the stock market, so far this year, hasn't been doing so hot.
Spouses Gail Liberman and Alan Lavine are syndicated columnists. You can purchase Alan Lavine & Gail Liberman's latest book Quick Steps to Financial Stability (QUE Publishing 2006) online at www.moneycouple.com or at your local bookstore. E-mail them at MWliblav@aol.com.
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