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SUMMER 2000 Newsletter

R & D Financial Services Inc.

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AVOID THESE INVESTMENT MISTAKES

Investing is a gradual process. You start out with one investment, adding some and selling some as the years go by. If you’re not careful, this can result in a conglomeration of investments that don’t fit your overall investment strategy. Thus, you should periodically review your portfolio to avoid these mistakes:

YOU DON’T HAVE A WELL-DEFINED ASSET ALLOCATION STRATEGY. Many investors select individual investments over the years, without really considering the overall makeup of their portfolio. Add up all your investments and calculate what portion is invested in each investment category. The most basic categories are stocks, bonds, and cash, but each category also has many subcategories. Since subcategories can have different risk levels (i.e., blue chip and small technology stocks have much different risk levels), review subcategories as well. Assess your current allocation and decide whether it makes sense for your personal situation.

YOU HAVE TOO MANY INVESTMENTS THAT AREN’T ADDING DIVERSIFICATION TO YOUR PORTFOLIO. Diversification can help reduce the volatility in your portfolio, since various investments may respond differently to economic events and market factors. Yet it’s common for investors to keep adding investments that are similar in nature. This does not add much in the way of diversification, while making the portfolio more difficult to monitor. Before adding an investment to your portfolio, make sure it is a good addition that will further diversify your investments.

YOUR PORTFOLIO IS PERFORMING POORLY. While everyone likes to think that their portfolio is beating the market averages, many investors simply don’t know for sure. Review the return of each component of your portfolio, comparing it to a relevant benchmark. While you may not want to sell based on one or two years of underperformance, you should at least monitor closely any investments that significantly underperform their benchmarks. Next, calculate the overall rate of return for your portfolio and compare it to a relevant benchmark. Don’t just look at the stock portion of your portfolio – include all your investments. Also, be sure to compare your actual return to the return you targeted when setting up your investment program. If you aren’t achieving your targeted return, you risk not achieving your financial goals. Now honestly assess how well your portfolio is performing. Are major changes needed to get it back in shape?

YOU TRADE TOO FREQUENTLY WITHOUT ADEQUATE RESEARCH. In this fast-paced investment world, it is tempting to trade often based simply on other people’s recommendations. Yet, besides the tax and trading costs associated with frequent trading, several studies have shown that frequent traders often underperform those who trade less frequently. For instance, a recent study of the stock-trading habits of men and women found that married men traded 45% more than married women, but earned annual risk-adjusted net returns that were 1.4% less than those women. Single men traded 67% more than single women, earning 2.3% less than those women (Source: Journal of Financial Planning, August 1999).

YOU DON’T CONSIDER INCOME TAXES WHEN INVESTING. Using strategies that defer income taxes for as long as possible can make a substantial difference in the ultimate size of your portfolio. For example, a recent study found that high-net-worth individuals could increase their annual total return by at least 2% by using tax-efficient investment strategies (Source: Trusts and Estates, March 1998). Some tax-efficient strategies to consider include utilizing tax-deferred investment vehicles, minimizing portfolio turnover, not selling assets simply to rebalance your portfolio, and placing assets that generate ordinary income or that you want to trade frequently in your tax-deferred accounts.

To help maximize the potential of your investment portfolio, you should try to avoid these investment mistakes. If you’d like help reviewing your investment portfolio, please call at (800) 878-4036.

With retirement now spanning a significant portion of the average retiree’s life, you should adequately plan for retirement well before that time arrives. The following tips can help with your retirement planning:

 

CALCULATE HOW MUCH YOU NEED TO SAVE BY RETIREMENT AGE. It’s tempting to avoid this calculation if you fear the amount will be overwhelming or if you think retirement is too far away. Yet, without a clearly defined goal, it will be difficult to gauge your progress over the years or to ensure that you have adequate savings when you retire.

DON’T RELY ON RULES OF THUMB WHEN ESTIMATING YOUR RETIREMENT EXPENSES. Every individual’s plan for retirement is unique. Some of your pre-retirement expenses are sure to decrease, while others are likely to increase. Don’t just assume that you’ll need a certain percentage of your income for retirement. Carefully review your expenses, deciding how you’ll spend your retirement years and how much it will cost.

PLAN ON FINANCING A RETIREMENT THAT COULD LAST DECADES. With increased life expectancies, it’s not unusual for a retirement to last 25 or 30 years. This reality will significantly impact the amount you need to save and how you invest those savings.

DON’T RELY ON SOCIAL SECURITY AND PENSION PLAN BENEFITS TO FUND YOUR RETIREMENT. These two benefits are funding a smaller percentage of retirement income and are likely to continue to decrease in the future. A significant portion of your retirement income will probably come from personal savings and investments.

START AN INVESTMENT PROGRAM IMMEDIATELY. If you can’t save the amount needed to reach your goals, at least get started saving something. Make a commitment to increase that amount every year. You need to make investing a habit and start that habit as soon as possible.

CONSCIOUSLY DECIDE HOW TO ALLOCATE YOUR RETIREMENT SAVINGS. How you allocate your savings among different investments will depend on your risk tolerance and how long you have to invest. For most people, that will mean that their portfolios will contain a significant percentage of growth vehicles to help protect against inflation’s effects over the long term.

TAKE ADVANTAGE OF ALL RETIREMENT PLANS. Invest in your company’s 401(k), 403(b), or other defined contribution plan as soon as you’re eligible. Also consider individual retirement accounts, both traditional and Roth.

CONSIDER WORKING AFTER RETIREMENT. Although retirement is typically viewed as a time for rest and leisure, many years of this can be overwhelming as well as expensive. Instead, you might want to ease into retirement by starting a business or working part time.

DON’T TOUCH YOUR RETIREMENT SAVINGS FOR OTHER THAN RETIREMENT PURPOSES. Don’t be tempted to borrow from your 401(k) plan or to spend part of a lump-sum distribution. Raiding your savings now will only make it more difficult to meet your future retirement needs.

Get started with your retirement plans now to help ensure that you meet your retirement goals. Call us today at (800) 878-4036 if you’d like help designating retirement strategies to help achieve your retirement goals.

START SAVING NOW

The long bull market in stocks has caused many investors to become more comfortable with the risks associated with stocks. Thus, as the above-average returns of stocks continue, it becomes more tempting to forget about diversification, allocating all of an investment portfolio to stocks.

But that strategy assumes that stocks will continue their strong advance well into the future. While past performance is not a guarantee of future performance, it is instructive to take a long-term view of the stock market’s performance. By decade, the real return (total return less inflation) of the Standard & Poor’s 500, an unmanaged weighted index generally considered representative of the U.S. stock market, was:

(Source: Financial Planning, January 2000)*

How many investors would have the fortitude to stay in the stock market during a period similar to the 1970s? The purpose of diversification, or asset allocation, is to protect your portfolio from downturns in any one asset class. In a diversified portfolio, the individual components do not always move together in the same direction or by the same magnitude.

During good times, diversification can act as a drag on total return. By definition, allocating anything other than all of your portfolio to the highest performing asset means that your return will be lower. But diversification is meant to protect your portfolio during market downturns and to reduce the volatility in your portfolio.

After this long stock market advance, review your portfolio to see if you’re comfortable with the risks. Is your portfolio over-concentrated in stocks? Could you remain calm during a protracted bear market? Are you willing to risk your portfolio’s profits during a significant decline in the market? Many investors have never experienced a significant bear market, so they will have to make educated guesses about how they would react. But if you’re not willing to watch your portfolio decline significantly, now may be the time to adjust your asset allocation, shifting some of your assets to other investment categories. If you’d like help reviewing your current asset allocation, please call us at (800) 878-4036.

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