Have You Learned Your Investing Lessons?
by Sherry Albertie Becker, Waddell and Reed
Investors can learn many lessons following a bear-market environment, especially as conditions seemingly become more bullish.
Knowledge can go a long way, particularly when considering the following investment rules of thumb:
Invest with a plan. Much of the riskiest investing, overbuying and panic selling during the late 1990s and early 2000s potentially could have been avoided if individual investors had created their own investment plan for achieving long-term specific goals, such as retirement or a college education. Such a strategy can serve as a reminder of investors' goals and strategies, and can guide them through market declines, while restraining them during boom times.
Stay invested. For some investors, this lesson can come too late. For example, panicked investors who bail out or drastically cut back in an unfavorable stock market environment may get back in only after they're "convinced" the market is rebounding. Yet missing out on the market gains during the early stages of recovery can dramatically reduce returns -- and the longer you wait, the more you could potentially lose.
Diversify, diversify. Many investors chased hot tech stocks in the late 1990s and got badly burned. Investors also overloaded on company stock, frequently with poor results. By adhering to your investment policy statement, you have the potential to better manage your risk.
Hold realistic investment return expectations. As investors painfully learned, those high double-digit annual returns of the late 1990s aren't average. Investors should look at the longer-term averages when setting their return expectations.
Avoid "rearview mirror" investing. Investors tend to focus on the immediate past. When stocks are booming, investors assume they will always boom. When stocks begin to slide, they fear they will slide forever. Instead, look forward to the long term.
Invest regularly. When you invest a specific amount in the same investment at regular intervals -- a technique called dollar-cost averaging -- you potentially may help reduce the risk of investing everything at market peak (the least favorable time to invest). By investing a fixed amount regularly, you buy more shares when prices are lower and fewer shares when prices are higher, potentially reducing your average cost per share.
Diversification and dollar-cost averaging do not guarantee a profit and do not protect against losses in declining markets. Since dollar-cost averaging involves continuous investment in securities regardless of fluctuations in the price levels of such securities, you also should consider your financial ability to continue investing through periods of high and low price levels. Investing is subject to market risks, and it is possible to lose money.
Waddell and Reed can be accessed on the Internet at waddell.com. Or, in Muskegon, contact Sherry Albertie Becker at (231) 727-8176 at 380 W. Western Ave., Suite 120, for more information.
Make Your Retirement Account Work Harder for You
by Sherry Albertie Becker, Waddell and Reed
Tax-favored retirement investment vehicles, such as individual retirement accounts and 401(k) plans, offer an attractive way to accumulate funds long term for your future. Are you taking full advantage of what they have to offer?
These tips may help you make the most of your retirement accounts:
Contribute the maximum. IRAs and 401(k) plans let you defer taxes on investment earnings until you receive them, presumably in retirement. (Roth IRA withdrawals generally are free from federal income taxes if certain conditions are met.) The tax advantages of these accounts may offer you greater accumulation potential than similar taxable investments. As an added bonus, your contributions may generate current tax benefits: Pretax 401(k) contributions reduce your current tax liability dollar for dollar, and your traditional IRA contributions may be tax-deductible. (Roth IRA contributions are not deductible.)
Please remember that withdrawals from a Roth IRA may be subject to state and local income taxes, and withdrawals before five years from the initial investment may be subject to federal income taxes. Withdrawals from a qualified retirement plan or traditional IRA generally are subject to ordinary income taxes. Withdrawals from a qualified retirement plan, traditional IRA and Roth IRA prior to age 59 1⁄2 may be subject to a 10% federal tax penalty. Certain exceptions apply.
Just say "rollover." You may be eligible to receive a lump-sum distribution from a qualified retirement plan if you retire, change jobs or the firm terminates its plan. If so, consider electing a direct rollover of the funds to an IRA (or to your new employer's qualified retirement plan). A direct rollover lets your retirement savings continue to grow tax-deferred until withdrawal. Even if you are retiring, you may not need the entire balance at once. With a rollover, you can spread out the distributions -- and the tax liability -- through your retirement years.
Invest according to your objectives. Most 401(k) plans offer a variety of investment choices to suit a range of objectives, and you may invest IRA assets in virtually any investment. What's more, you may adjust your investment allocation in tax-deferred accounts without current tax implications. Your Waddell and Reed financial advisor can help you determine an investment mix with a comfortable balance of risk and return potential. Contact him or her today to learn more about how to make the most of your retirement accounts.
Investors should consider the investment objectives, risks, charges and expenses of a fund carefully before investing. For a prospectus containing this and other information for the mutual funds offered by Waddell and Reed, call your financial advisor or visit us online at www.waddell.com. Please read the prospectus carefully before investing.
Please note that mutual funds will fluctuate in value and an investor can lose money by investing in mutual funds.