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Do Your Investing the Right Way
In many respects, investing is like running a business. There's a wrong way and a right way to do things. The right way increases your chances for investment success. But the wrong way can lead to throwing good money after bad.
Keeping that in mind, here are some common "do's and don'ts" for investors to follow.
* Do avoid unnecessary risks. You may seek to diversify your portfolio to avoid the risks associated with a large investment in a single category. For instance, your portfolio may include such different investment vehicles as mutual funds, money market funds, stocks, bonds, annuities, United States savings bonds, Treasury obligations and certificates of deposit (CDs)-just to name a few of the possibilities. Note: Diversification does not eliminate the risk of investment losses. Also, remember to diversify within the different classes of investments. For instance, instead of investing in one mutual fund, you might spread out your investment dollars among several types of funds.
* Don't be overly conservative. The uncertainty of the stock market has been well documented. But awareness of this potential volatility can lead to a problem of a different sort: being too conservative. Based on the historical performance of the S&P 500, it may be reasonable to allocate a significant portion of your portfolio to the equities market. Of course, past performance is no guarantee of future results. Furthermore, changes in your personal situation or economic trends may dictate a shift in your allocation of assets.
* Do broaden your investment portfolio. At one time, investing overseas was best left to sophisticated globetrotters. But today it is important to include international investments in your portfolio in order to balance out domestic economic trends. For instance, you may choose to invest in either (1) global or international mutual funds, (2) securities of foreign corporations or (3) American Depository Receipts (ADRs). ADRs are certificates issued by U.S. financial institutions representing shares of foreign corporations. Caution: There are several special risks associated with foreign investments, including problems relating to transaction requirements, conversion of currency and the possibility of political instability.
* Don't overpay Uncle Sam. You may think that all the money you pocket from the sale of investments is yours. It's not. Uncle Sam still has to be paid his fair share at the end of the year. On the other hand, you can use capital losses to offset your capital gains for the year plus up to $3,000 of ordinary income. With some astute tax planning, you may be able to minimize the tax damage. In addition, certain high-income taxpayers may benefit from investing in municipal bonds and/or municipal bond funds that produce tax-exempt income.
* Do your homework. Simply put, there's no substitute for doing research. Although you may have been successful in the past by playing your hunches, sooner or later you are bound to guess wrong. Look over the offering prospectus and/or other information for each investment you are considering. Your professional investment advisers can provide assistance in this area.
* Don't follow the crowd. All too often, investors jump from one investment to another looking for that hot stock or fast-rising fund. It makes more sense to plan for the long term. That is especially true when you invest in the stock market. Consider all of the aspects of any investment, including past performance and the prospects for the future.
* Do review your portfolio on a regular basis. You need to constantly keep an eye on market movements and other significant current events. Reason: When the situation changes for the better, you will be poised to react quickly and reap the benefits. You can usually track your investments quite easily by checking the financial section of your newspaper or on the Internet. In addition, you might want to sit down and review your portfolio at regular intervals.
* Don't invest more than you can afford. Give yourself a cushion if worse comes to worst. Typically, you should have a cash reserve to pay about six months' worth of expenses. In other words, you should not be investing heavily in the stock market if you are worried about paying this month's utility bills.
* Last, but not least: Do seek professional assistance when it is appropriate. There is no reason why you should have to go it alone.