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Four “Never-to-be-broken” Rules for Investing
By Laury Adams

1. Diversify


          In the unpredictable world of investments, diversification is the best insurance against unforeseen disaster.  There is never one type of investment that will be a top performer in all years.  In past years, we have seen “bubbles” in tech stocks and real estate.  And sometimes small stocks perform better than large stocks, or international stocks might be more profitable than domestic equities.  The old adage, “Don’t put all your eggs in one basket,” certainly applies to investing.  Diversification is essential for portfolios on any size.  This is the best way to limit risk.

2. Comparison Shop


          We may be conscientious about comparison shopping at the supermarket, but might never think of it when purchasing an investment.  Let’s assume that you have decided on a financial product that is appropriate for meeting your goals.  Now ask some relevant questions. 

     These days, it is extremely difficult to determine how people in the financial industry are being compensated.  They will give you information about the product or service that is being sold, but it is up to the investor to do the comparison shopping.  News publications and Internet sites provide much information, but be sure to check on the source.

3. Think “After-Tax” Dollars


     What you make is what you keep after paying the government!  The tax on your investments is an important consideration in developing a portfolio.  Investments that are taxed at the long-term capital gains rate are certainly more advantageous than paying at ordinary income rates.  But these investments usually carry more risk.

     There are formulas that can be used for calculating and taxable equivalents when making tax-free investments: 
 
     Tax-free Rate
     1- your tax bracket        = _____% the equivalent in a fully taxed investment

     Example:
       3.4%  Tax-Free
        1- 33% tax rate (.67)   = 5.07% in a fully taxed investment

4. Ask an IMPORTANT QUESTION:  “How do I get out of this investment?

      First, this question pertains to the liquidity of your investment.  Is your money available if you need it? 

      Secondly, you should consider the cost of getting out.  “Exit costs” will differ depending on the type of investment.  On annuities, there is usually a decreasing percent of penalty for each of the first six or seven years they are held.  Annuities and IRAs also have a federal tax penalty of 10% if funds are withdrawn before you reach 59 ½ years of age.  On certain mutual funds, there may be a back-load or redemption fee.  Getting into investments is easy.  It only requires your signature on a check.  Getting out may not be as easy.  Do not risk unpleasant surprises if you need to withdraw your money.

 

Copyright 2008, Laury Adams