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Answer:
Dear
BuyandHolder,
You're
right on target. It is time to dust off your portfolios
and reconsider your holdings. Actually, you should
do this at least once a year regardless of your age,
the state of the economy or the amount of money you
have. Keep in mind that buying and holding does not
mean buying a forgetting!
In
general, think in terms of long term investing in
accounts geared toward funding your retirement --
that is unless you are just a few years away from
permanently going fishing. Even then, a portion of
your account should be in growth stocks -- Americans
are living longer and longer and your portfolio should
continue to do the same.
Contribute
The
most important step you can take is to contribute
the max to both your IRA (which of course you can
do here at BUYandHOLD) and your 401(k). Both have
impressive tax advantages -- with IRAs your money
grows on a tax-deferred basis. If you have a Roth
IRA, the money will not be taxed when taken out after
age 59 1/2. If you have a traditional IRA, you may
qualify for a tax deduction on your contributions.
Of course, with a 401(k) there's the added bonus of
employer matching, which is really like found money.
Although
some of your retirement account money should be allotted
to growth stocks, if you're still a little jittery
about the market, park your contribution in a money
market fund. (CLICK
HERE to learn more about money market funds here
at BUYandHOLD.) It will earn something and you can
move it into stocks later on. The key point: make
your contribution first (don't spend it and) and worry
about investing it later on.
Make
regular contributions
With
a 401(k) the money is automatically taken out of your
paycheck, so it's a no-brainer way to save. With your
IRA, however, you need to be more disciplined. Bear
in mind, however, that you're not required to put
the maximum contribution ($3,000 in 2003) into your
account all at once. Why not put $250 in each month?
Do so regardless of the market -- you'll benefit from
the technique known as "dollar cost averaging"
in which you buy more shares of a stock or mutual
fund when prices are low and fewer shares when the
cost has risen. For details on dollar cost averaging,
CLICK
HERE.
Redo
your asset allocation
Buy
and forget can be disastrous. Look over your portolio's
asset allocation - - that is, how it's invested among
the three major asset classes: stocks, bonds and cash.
Then, make adjustments in terms of your age, your
goals and the market. How much should be invested
in each of the three asset classes was the subject
of an earlier column. CLICK
HERE. We recommend that you set a date twice a
year, perhaps your birthday and then six months later,
to rebalance your portfolio.
Diversification
This
is a further refinement of asset allocation. Whereas
asset allocation applies to the three major categories,
diversification applies to allocating your money among
securities within each asset category. You particularly
want to spread out your investments among stocks and
bonds to further reduce your risk level. You should
have both growth and income stocks as well as stocks
that are leaders in several different industries,
such as food & beverages, retail, drugs, public utilities,
technology, finance, petroleum, manufacturing, etc.
In
addition, be sure you have both short and long-term
bond funds.
You
can also diversify by investing in an exchange traded
fund (ETF). They are traded as stocks but they offer
an alternative to an index mutual fund. The various
ETFs are made up of baskets of securities that trade
on a particular exchange.
A
final word of caution
Your
401(k) should not be overweighted with your company's
stock. If you're tempted, just remember what happened
to thousands of Enron employees when the company went
into bankruptcy.
Periodic
Investment Plans, Dollar-cost averaging and Compounding
do not assure a profit and do not protect against
losses in declining markets and you should consider
your financial ability to continue to purchase through
periods of low price levels.
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