October 2008 Financial Crisis: What do I do now?

Six Principles For Successful Investing

To some people, investing is a mystery. An unpredictable world of formulas and strange terminology. Others will tell you that it’s simply a matter of luck that depends on a hot tip or picking the right investment at the right time. These perceptions are common, but they are generally wrong. In fact, the principles of long-term investment success are available to anyone.
1. Plan to succeed- If you are going to be a successful investor, you need a plan that takes into consideration your financial goals, your time horizon for achieving each of them and your tolerance for risk. Most investors have more than one goal—and more than one time horizon—which makes it even more important to have a plan.

2. Manage risk through asset allocation- Asset allocation is an effective way to spread risk without giving up the opportunity for a solid return. When your portfolio is divided among different asset classes, market sectors, investment styles and geographical regions, it can reap the rewards when one or more market segments rise. And when a market segment declines, other investments can help cushion the blow. Asset allocation does not guarantee investment success, but it can play a significant role in helping you manage risk.

3. Invest regularly, start now-Discipline yourself to invest regularly by making investing a priority—part of the monthly budget. The earlier you get started, the faster you can build your savings because time—and compounding—are on your side. Consider the example in the chart below. If you invested $200 each month beginning at age 25, and your investment earned 8% annually, you could accumulate $100,000 by age 44. You would have to invest nearly three times as much to achieve the same goal, if you started investing ten years later at age 35.

4. Think long term- Once you have an investment plan, an asset allocation plan and a schedule for regular investing, it’s essential to keep a long-term perspective. Here’s what that means: Give your strategy plenty of time to work. Measure your investment progress over a period of five to seven years. Be prepared for lean years in the markets as well as good years. And when the markets do hit a rough patch, talk to your financial professional before you make any change to your portfolio.

5. Pay attention to taxes- When you profit from your investments, chances are you’ll turn a portion of your dividends and capital gains over to the IRS. But you may be surprised at the impact taxes can have on your investments. They lower your current return, and they also reduce future returns, because the money paid out in taxes never has a chance to compound. You can save on taxes four ways.
• Lower your current tax bill by choosing tax-deductible retirement accounts, such as IRAs. 401 (k)s, and 403 (b)s.
• Get more from your retirement investments through tax-deferred compounding.
• Eliminate income tax on future retirement withdrawals by choosing a Roth IRA.1
• Reduce taxes on current investment income by choosing tax-exempt municipal bond funds.
Your financial advisor can help you find the right combination of funds to maximize your personal financial situation.

6. Work with a financial professional- After your family and your health, few things are more important than your financial well being. That’s why it’s important to work with a knowledgeable financial professional. You can expect a financial professional to help you formulate an investment plan, choose investments and strategies that are appropriate to your personal financial situation and keep your financial goals on track by fine-tuning your asset allocation. A financial professional is someone you can turn to when market trends change, someone you can consult when you need expert advice.

1. In order to contribute to a Roth IRA, you must meet certain eligibility requirements. Tax free withdrawals are available after age 59 1/2 and five years after opening a Roth IRA.

MONEY MIKE