Financial Focus/Is Your Money Working Hard Enough?
It’s almost Labor Day - the day when we “officially” recognize the contributions that workers have made to this country. But this Labor Day, why not also consider how hard your money is working for you? You may be surprised by what you find.
Don’t Overload on “Lazy” Investments...
As you review your portfolio, try to determine if you have too many “lazy” investments, such as Treasury securities and certificates of deposit (CDs). Of course, these vehicles will almost certainly preserve your principal, and they pay you a fixed rate of return in the form of interest payments. So, why are they lazy?
Here’s why: They may not produce the growth you need to achieve your long-term goals and the income they provide may not even keep you ahead of inflation.
This second point should be of particular concern now, when inflation may be heating up. Over time, inflation can significantly erode the purchasing power of your investment income. Unfortunately, most types of fixed-income securities are not adjusted for inflation so, each year, your investment income may be falling further and further behind the amount you need to keep up with the cost of living.
Look for “Hard-working’’ Alternatives
If you rely on your investment income to supplement your cash flow, what are your alternatives to the above-mentioned vehicles? Here’s one possibility: Invest in stocks that have historically paid dividends. You can find some high-quality stocks that raise their dividend payments year after year, thereby providing you with a source of income that can help you stay ahead of inflation.
Furthermore, most domestic stock dividends are now less “taxing’’ than they were a couple of years ago. Before 2003, dividends were taxed at your individual income tax rate. But after the passage of new tax laws last year, qualified dividends are now taxed at a maximum of 15 percent. (The law expires on Dec. 31, 2008; after that, dividends are again scheduled to be taxed at your personal tax rate.)
Not all stocks may distribute dividends - but even those that don’t can work hard for you by providing growth opportunities. In fact, over the past seven decades, stocks have significantly outperformed all other asset classes. From 1926 through 2003, stocks, as represented by the S & P 500, returned, on average, 10.4 percent per year, according to Ibbotson Associates, an investment research firm. (Keep in mind, though, that the S & P 500 is an unmanaged index; you cannot invest into it directly.) Over that same time period, according to Ibbotson, long-term corporate bonds averaged just a 5.9 percent annual return, while U.S. Treasury bills returned just 3.7 percent annually.
Consider Risk Tolerance and Time Horizon
While stocks may be the hardest-working investments you can own, you don’t want to own only stocks; they are subject to market risk, including the potential loss of principal invested. Instead, place your stocks in a diversified portfolio that also contains bonds, government securities, money market accounts and CDs.
And make sure your portfolio reflects your individual risk tolerance and time horizon (the number of years in which you plan to invest). Within this context, your hard-working stocks can pay off for you in the years to come.
This article was submitted by the local financial representatives of Edward Jones.