Playing it Safe
- Alan Lavine and Gail Liberman
Regardless of how much or how little you know about your money, there are some simple rules of thumb to help bring you up to speed.
Once you understand some of these, you, at least, should be able to talk comfortably with your adviser and figure out how well he or she is doing.
The first rule is to stick with high-quality stock and bond investments. Don't bet the ranch on hot stocks or buy high-yield bonds issued by companies with poor credit ratings--unless it's with money you don't mind losing.
Spread your risks. Don't put all your eggs in one basket. Keep money in stocks, bonds, cash and inflation hedges, like gold or real estate.
Monitor investments monthly or quarterly. If your financial condition or economic conditions change, make adjustments.
Invest to beat the taxman. If you're paying Uncle Sam through the kazoo, consider tax-free municipal bonds. On the stock side, offset your losses with gains. Consider investing as much as possible in tax-deferred or tax-free retirement accounts.
High rates generally mean high risk. Don't swallow the bait unless it's with money you don't mind losing.
High yields on bonds are particularly deceiving. Reason: When interest rates rise, bond prices fall if you need to sell them. So if you invest in a bond with an attractive rate, expect the value of your bond to drop if rates head up and vice versa. Not selling or trading your bond? In that case, you needn't worry--unless the issuer goes out of business or "calls" the bond. If a bond is called, the issuer returns your money, typically forcing you to reinvest at lower rates.
With a bond mutual fund, however, you do need to worry if interest rates rise. That's because your fund manager is constantly buying and selling bonds, so its value fluctuates.
Don't be fooled by bond ratings, which can be misleading. A "B" rating, unlike when you were in school, does not mean you've made the honor roll. In fact, corporate bond ratings below BBB and Bbb by Standard & Poor's and Moody's, respectively, are downright risky.
By contrast, corporate bonds and municipal bonds rated AAA by Standard & Poor's and Aaa by Moody's are issued by the financially strongest corporations.
The lowest-risk fixed annuities are offered by insurance companies, rated A+ and A++ by A.M. Best and AAA by Standard & Poor's.
Spouses Gail Liberman and Alan Lavine are syndicated columnists. You can purchase Alan Lavine & Gail Liberman's latest book Quick Steps to Financial Stability (QUE Publishing 2006) online at www.moneycouple.com or at your local bookstore. E-mail them at MWliblav@aol.com.
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