10 simple rules could
As an investor, you have a lot of questions. How will the markets do in 2005? Will the economy prosper? Where will interest rates go? These issues are not meaningless -- but if you really want to work toward achieving long-term investment success, you'll look past short-term factors and follow some "time-tested" investment strategies.
Here are some techniques to consider:
>> Stick with your investment plan: If you adjust your investment plan, do it for the right reasons, such as a change in the long-term outlook for one of your investments or the realization that an investment no longer meets your goals.
>> Diversify and re-balance: By spreading your money among a variety of investments that could rise and fall at different times, you'll avoid taking those big "hits" that might affect just one asset class. You might also need to re-balance your holdings occasionally to make sure the percentages of your portfolio taken up by different assets still fit your risk tolerance and time horizon.
>> Reduce the size of an investment that's too large: If you put a large amount of money in a single stock, for example, you are taking a substantial risk. With the capital gains rate now at a maximum of just 15 percent, you have a good opportunity to sell off shares of a stock and help diversify your portfolio. Having too much in one investment is a risk that might not be worth taking.
>> Keep investing: Although past performance is no guarantee, over the long term, stocks have significantly outperformed all other asset classes. So, keep investing in high-quality stocks and don't get dissuaded by short-term "bumps" along the way.
>> Look for rising income opportunities: To boost your investment income, consider buying stocks that have historically increased their dividend payouts. And dividends are now even more attractive because they are taxed at a maximum rate of just 15 percent. (Keep in mind, though, that stocks are not fixed-income investments and might not pay dividends.)
>> Don't forget "growth-and-income": Many investors are attracted to the potentially high returns of "growth" and "aggressive growth" stocks. But there's almost certainly a place in your portfolio for good, solid "growth-and-income" investments, which provide opportunities for capital appreciation and current income.
>> Limit exposure to risky investments: Be cautious about investing in emerging markets, "junk" bonds, technology stocks and commodities such as oil and gold. Before adding these volatile investments to your portfolio, consult with a financial professional who knows your needs and risk tolerance.
>> Build a "bond ladder": By building a "ladder" consisting of bonds of varying maturities, you can help to protect yourself in all interest-rate environments. When market rates are low, you'll have your high-rate, long-term bonds working for you. Then, if rates rise, you can reinvest the proceeds of your short-term bonds into new bonds issued at the higher rates.
>> Reinvest, reinvest, reinvest: If your investments generate dividends or interest that you don't need to meet monthly expenses, consider reinvesting that income to put the power of compounding to work.
>> Follow principles, not predictions: No one can predict with total accuracy what 2005 -- or future years -- will bring to the financial markets. So, stick with the investment principles that never go out of fashion, such as diversification, investing in quality and maintaining a long-term perspective.
By following these 10 basic strategies, you can help yourself make steady progress toward your financial goals in 2005 -- and beyond.
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Guy Steele is a financial planner and head of the Pali Palms office of Edward Jones. Send planning and investing questions to him at 970 N. Kalaheo Ave., Suite C-210, Kailua, Hawaii, 96734, or call 254-0688. His column runs Saturdays in the Star-Bulletin.
( See the Columnists section for past articles. )
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