Tips on Fund Investing in the New Year
By Clint Willis
BOSTON (Reuters) - Did your list of New Year's resolutions include a promise to get your investments on track?
If so, good for you. If not, don't fret: It's never too late to get serious about putting your financial house in order.
With that in mind, here are some tips for mutual-fund investors looking improve their financial health in 2002:
-- Reexamine your investment plan. The New Year is a great time to make sure your current investment plan is still on track to help you reach your long-term financial goals -- and to make the necessary changes if it isn't.
For example, the stock market's miserable performance last year -- and the strong performance of many types of bonds -- may mean that equities now make up a smaller percentage of your portfolio than they did a year ago.
A quick look at your portfolio might reveal that your allocation to stock funds has fallen below your target level. If so, it's time to beef up your exposure to stocks. Likewise, you may have socked away some money into money market funds in the wake of stock market volatility. Now may be the time to put some of that cash back to work again in other investments.
-- Visit a financial planner. Younger investors, many of whom are experiencing their first recession and significant stock-market downturn, might especially benefit from some expert advice these days-and even experienced investors could use some. A financial advisor can review your investment plan and reassure you that you're on track -- or offer guidance if you've made a few wrong moves.
Advice: Choose an advisor that you trust. Ask friends or co-workers who use planners for recommendations. Then meet with a few face-to-face. Most initial visits are free, and the effort you put into find a good financial planner will pay off down the road.
-- Don't forsake savings. It may seem tough these days to put aside money for investing. The recession, rising unemployment and corporate cutbacks have hit many Americans in the pocketbook. But interrupting your savings now could hurt your chances of achieving long-term goals such as paying for college tuition or financing a comfortable retirement.
One way to help build and maintain a steady habit of saving and investing is to sign up for an automatic investment plan (AIP), offered by most mutual-fund companies. Under such a plan, a fixed amount of money-often between $25 and $100 -- is invested directly from your checking account each month.
Even such small monthly investments can make a big difference in the size of your portfolio over time. Consider that a $50 monthly investment will grow to more than $9,167 in 10 years (assuming a modest 8 percent annual return). Best of all, the money is automatically deducted from your checking account -so you probably won't even miss it.
-- Take advantage of the new tax laws. Tax-deferred plans such as 401(k) plans and IRAs have long been a fund investor's strongest allies. Thanks to the Economic Growth and Tax Relief Reconciliation Act of 2001, these plans are now even better. For example, the limit on tax-deferred contributions to 401(k) plans rises from $10,500 in 2001 to $11,000 this year (and climbs by $1,000 a year to $15,000 in 2006). Workers aged 50 and older can make additional ``catch-up'' contributions of as much as $1,000 in 2002 (that amount rises by $1,000 each year until it hits $5,000 in 2006).
IRA investors also benefit from the new law. Beginning this year, IRA investors can contribute $3,000 to their account -- a 50 percent increase from last year. That maximum contribution will continue to rise in the coming years.
-- Stick with stocks. For some investors, it's been tempting lately to altogether avoid funds that invest in stocks. After all, the typical domestic stock fund fell 11.4 percent in 2001. But despite their recent slump, stocks still offer the best opportunity to grow your money fast enough to outpace inflation and meet your long-term goals.
What's more, the risk of losing money in stocks declines the longer you hold them. A study by investment management firm L/G Research shows that stocks have never posted a negative return over any 10-year period since 1950.
``A long-term investment portfolio simply must include stocks or stock funds,'' says Michael Chasnoff, a financial planner in Cincinnati. ``Poor performance from stocks over a one- or two-year period doesn't change that.''
(Clint Willis is a freelance writer who covers mutual funds for Reuters. Any opinions in the column are solely those of Mr. Willis.)
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