Labor Day will be here again before you
know it—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 oppors, 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.
Jesse Abercrombie, Edward Jones
Investments, works specifically with those in the
electrical industry with their retirement planning
needs. For questions or comments, please contact him at
972-241-8059 |
