FINANCIAL STRATEGIES SECTION

What are Financial Strategies

What, exactly, are “ financial strategies?” There is no right or wrong answer. Each person has his or her own definition. But, I can tell you that I consider “financial strategies” to be more than spreadsheets and time tables.

Our goal is to help you make informed decisions about issues that affect your financial well-being so you can achieve financial freedom.

We will work with you to help you determine what’s important to you in your life. Together, we’ll create a road map to take you where you want to be.

Creating financial strategies isn’t impossible. You just need to sit down with a professional and do it.

My goal is to provide you with peace of mind. The peace-of-mind that comes from knowing that your objectives and goals will be reached because you are working with someone you can trust. By working with someone well-versed, trained, and knowledgeable about financial planning and one who keeps abreast of changes that occur in the financial world, you can successfully:

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Diversification

Why Is Diversifying My Investment Portfolio So Important? 

Virtually any investment has some risk associated with it. The stock market rises and falls. An increase in interest rates can cause a decline in the bond market.

The key to successful investing is to minimize that risk while maintaining an attractive return on your investments. One of the most effective ways to minimize your risk is to diversify.

The main philosophy behind diversification is really quite simple: “Don’t put all your eggs in one basket.” Spreading the risk among a number of different investment categories — stocks, bonds, money market instruments, for example, or over several different industries, or a mutual fund with its own broad range of securities in one portfolio can help offset the loss in any one investment.

Likewise, the power of diversification can smooth your returns over time. As one investment increases, it offsets the decreases in the other, and vice versa. By reducing the impact of market ups and downs, diversification can go far in enhancing your investing comfort level.

Diversification is one of the main reasons why mutual funds are so attractive for both experienced and novice investors.

For a modest initial investment — often as little as $250 — you are purchasing shares in a diversified portfolio of securities. You have “built-in” diversification. Depending on the objectives of the fund, it may contain a variety of stocks and bonds, or a combination of the two.

Mutual funds can be an easy and effective way to build a portfolio. They can help you save and invest for long-term growth or current income.

Diversification does not guarantee against loss; it is a method used to manage risk.

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Investing In Mutual Funds

What Can Mutual Funds Offer Me?

Mutual funds are a popular investment vehicle simply because they offer a number of features to suit the objectives of many types of investors. They provide a number of features, including built-in diversification, professional management, convenience, low investment minimums, and a wealth of investment choices all in one package.

What Is a Mutual Fund?

A mutual fund is a pooled investment. When you buy shares in a mutual fund, you are buying shares in a professionally managed portfolio of stocks, bonds, or other securities. Investment managers are responsible for buying and selling securities according to specific investment objectives. 

Diversification

Buying shares of a mutual fund gives you built-in diversification. A single mutual fund holds many different securities.

Mutual funds may diversify within asset classes; for example, a growth fund may invest in a portfolio of stocks. Or the fund may diversify across asset classes —when a balanced mutual fund invests in a variety of stocks and bonds, for instance.

Whatever the case, diversification generally reduces investment risk and provides the potential for better long-term returns.

Professional Management

When you buy into a mutual fund, investment professionals manage your money. They carefully research, select, and supervise all the assets in the mutual fund. This frees you from having to select and track individual investments. When you invest in mutual funds, you get access to some of the finest investment minds on Wall Street.

You should remember that past performance is no guarantee of future results. The value of your shares will fluctuate with the changes in market conditions, and when sold may be worth more or less than the original investment amount.

Flexibility

Often, mutual funds belong to a "mutual fund family." You may be able to shift your investment among different types of mutual funds, often with no more than a phone call. That way your portfolio can easily be tailored to suit your financial situation and your expectations about the market.

Convenience

Mutual funds make managing your portfolio very easy.

Periodic statements will fill you in on the performance of your mutual fund, transactions within your account, and more. You’ll also be kept informed about the taxability of your distributions.

Low Investment Minimum 

Finally, many mutual funds offer low initial investment amounts – some as low as $1,000, and in other cases, even less. Mutual fund fees also vary and can be lower than other investment alternatives. Mutual funds are offered by prospectus, which contains complete information about the objectives, risk, fees and minimum investment amounts. It should be read carefully before investing.

All in all, mutual funds offer a variety of benefits. In many cases, they are ideal investment vehicles for experienced and beginning investors.

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Types of Mutual Fund

What Types of Mutual Funds Are Available?

There are thousands of different mutual funds offered on the market. They range from funds that include a broad variety of investments to funds that invest exclusively in single securities or narrow sectors of the market. With the many different investment styles and objectives, there’s bound to be a number of mutual funds that are suited to your investing profile. Each of these funds has expense, risk, and return characteristics. Be sure you understand these characteristics before you invest. There are 15 principal types of funds. We have listed them according to their primary objectives: growth, income, and specialized.

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Load VS No-Load Funds

Load and No-Load Funds: What Should I Know?

On the surface, it seems like an easy choice. Why pay a 1 percent to 8¹/2 percent front-end commission on a fund to some broker when you can buy a fund that doesn’t charge a commission? That’s the choice: “load” versus “no-load” funds.

But what looks like a simple exercise in decision making really is more a reflection of the kind of investor you are.

Service vs. Self-Reliance

The issue here really is the degree of service you want.

A load fund, for example, generally compensates a financial professional to spend time with you at the beginning of your relationship, learning about your objectives and suggesting an investment program, keeping in touch with you and answering any questions you may have. In addition, there are often choices as to how and when to pay the sales charge.

This is particularly handy for busy people whose idea of investment tracking amounts to little more than an occasional call to their broker.

No-load funds, on the other hand, may appeal to you if you like to take charge of your investments — if you like to immerse yourself in monitoring what they’re doing and don’t need help with allocating assets or selecting individual mutual funds.

Are No-Loads Really No-Loads? 

If the profile of the no-load investor sounds like you, remember that a no-load fund puts more of your money directly to work than a load fund does.

But all funds, even no-loads, have management and expense fees. And not all no-load funds are the same.

Some actually charge a small load, or a 12b-1 fee. That fee, as much as ¹/2 of 1 percent of total fund assets, is used to cover advertising and marketing costs. You can determine whether your “no-load” fund charges something by scanning the fund’s expense-to-net-assets ratio, which shows how much of every fund dollar goes to expenses.

Knowing all the facts is one thing, but applying them to your individual situation is another. Don’t be afraid to ask for help in deciding whether load or no-load funds are right for you.

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Fixed Annuities

Can an Annuity Help My Retirement Money Grow Tax Deferred?

What Is an Annuity?

An annuity is a contract between you and an insurance company. In exchange for a current premium, your insurer agrees to pay you a future stream of income. Annuities are very flexible financial vehicles. You can pay your premium all at once or you can pay it over time — it’s up to you. In addition, you can specify when you would like to begin receiving the income from your annuity. You can start immediately or you can let your annuity accumulate.

One of the most attractive features of annuities is that they are allowed to grow tax deferred. Because you do not have to pay taxes on the growth of your annuity until withdrawn, annuities have become an attractive accumulation alternative.

Immediate Annuities

With an immediate annuity, payments usually begin a month after you have paid a lump sum premium. This makes them a popular source of supplementary income for retirees.

Immediate annuities provide some tax deferral. Only the interest portion of each payment is considered taxable income. The rest of each payment is considered a return of your principal. Taxes on the earnings of the annuity are spread over the payout period, which means you pay fewer taxes in the early years.

Deferred Annuities

With a deferred annuity, you allow your premiums to accumulate before you begin the payout period. Deferred annuities give you the option of paying fixed or flexible premiums, and you can pay them all at once or over time. The earnings of the annuity are not taxed until they are withdrawn. This may allow you to accumulate more over the long term than taxable investments would. And you decide when to start receiving income from your annuity.

Annuities are insurance-based financial vehicles designed to provide income in retirement. There may be a 10 percent penalty on amounts withdrawn prior to age 59¹/2, in addition to regular income taxes. Surrender charges may also apply in the early years of the policy.

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Variable Annuities

What Control Will a Variable Annuity Give Me?

Fixed annuities combine preservation of principal, fixed returns and tax-deferred growth. This makes them a unique alternative to other taxable accumulation vehicles.

But what about investors who want more control over the growth of their annuities? What about investors who may be seeking greater long-term growth than that offered by fixed annuities? Fortunately, you have a choice. Variable annuities combine the tax deferral of traditional annuities with investment flexibility. This makes variable annuities a popular alternative for many types of investors.

What Is a Variable Annuity?

A variable annuity is an annuity contract that provides variable rather than fixed returns. The key feature of a variable annuity is that you have control over how your premiums are invested.

When you pay your premium, you choose from a variety of different investment “subaccounts,” such as stock, bond, and fixed-interest options. Your premium can be allocated among these portfolios. Unlike traditional annuities, which pay fixed interest, the value of your variable annuity is based on the performance of the subaccounts you select. These subaccounts will fluctuate in value and may be worth more or less than the original cost when redeemed.

A Tax Strategy

Variable annuities provide the dual advantages of investment flexibility and the potential for lower current taxes. The taxes on all interest, dividends, and capital gains are deferred until withdrawals are made.

When you decide to receive income from your annuity, you can choose a lump sum, or a fixed or variable payout. The earnings of the annuity will be subject to ordinary income taxes when you begin receiving income.

A Host of Other Benefits

Variable annuities offer a host of benefits. They are ideal for using investment strategies such as asset allocation and dollar cost averaging. Variable annuities are flexible, and they can be tailored to suit the needs and objectives of just about any investor. And insurance companies offer a variety of services to make this financial strategy easy to implement and maintain.

Considerations

As with other types of annuities, be aware of surrender charges and the 10 percent penalty for withdrawals prior to age 59¹/2. In addition, variable annuities have management fees and other expenses, which are generally higher than those found in fixed annuities. With variable annuities, you have the options, features, and investment flexibility that may help you target and meet your retirement goals.

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Investment Risks

What Investment Risks Should I Know About?

Taken by itself, the word "risk" sounds negative. But broken down into what it really stands for in terms of investing, it begins to be a little more manageable. By understanding the different types of risk and keeping an eye on your investments, you may be able to manage your money more effectively. Remember, strategic investing doesn’t mean "taking chances" so much as "making decisions." Long-term investing and diversification may be some of the most effective strategies you can use to minimize investment risk.

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Managed Investments

What Stock and Bond Alternatives Do I Have? 

Most prudent investors have at least some of their holdings in stocks, corporate bonds, or both. In fact, when most people think of “investing,” they think of Wall Street and the stock markets.

Many fail to realize that there are a number of ways to invest in stocks besides owning individual shares.

Mutual Funds

A mutual fund is a collection of stocks, bonds, or other securities. Investors purchase shares of the mutual fund that is managed by a professional investment company.

A typical mutual fund holds dozens of different securities. That offers some measure of diversification — a sharp decline in an individual security won’t be nearly as damaging to your portfolio as it would be if you only owned a few securities.

Mutual funds are professionally managed. Some of the finest managers on Wall Street devote their attention to buying and selling securities according to the goals of their funds.

And mutual funds often have a minimum investment of only $1,000 — some will accept even less.

Variable Universal Life Insurance

The insurance companies have developed some innovative products that enable you to invest in a wide range of securities — including stocks — through your life insurance policy.

A variable universal life (VUL) insurance policy operates much the same as a “traditional” universal life policy. In exchange for premiums, the insurance company provides a death benefit. And, just like more traditional life insurance policies, the cash value within the policy accumulates tax deferred.

But here is the unique difference: you decide how the premium is divided among the subaccounts. With most policies you can select from several different investment subaccounts.

These investment options allow you to participate in the market and experience the gains and losses realized by the underlying securities.

The cash value of a VUL policy is not guaranteed. The investment return and principal value of the variable subaccounts will fluctuate. Your cash value, and perhaps the death benefit, will be determined by the performance of the chosen subaccounts. Withdrawals may be subject to surrender charges and are taxable if you withdraw more than your basis in the policy. Policy loans or withdrawals will reduce the policy’s cash value and death benefit, and may require additional premium payments to keep the policy in force.

Variable Annuities

The insurance companies have developed another interesting product: the variable annuity.

With a variable annuity, you invest a sum with an insurance company, just as you would with a fixed annuity.

But instead of investing your money in its general account, as with a fixed annuity, the insurance company invests it in a separate account. Like a variable universal life insurance policy, this separate account is made up of a number of different investment subaccounts. You specify how much of your annuity will be invested in the various subaccounts.

Your return will be based on the performance of the investments you select.

Withdrawals made from a variable annuity prior to age 59¹/2 may be subject to a 10 percent penalty. Generally, surrender charges apply if withdrawals are made in the early years of an annuity or life insurance policy. Subaccounts fluctuate with changes in market conditions, and when surrendered, your principal may be worth more or less than the original amount invested.

As with most financial decisions, there are associated expenses. Be sure you understand and compare them prior to investing.

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Dollar Cost Averaging  

What Are the Avantages of Dollar Cost Averaging?

When markets get a little too volatile for your liking, it may be a particularly good time to adopt a disciplined investing approach.

As opposed to “right-brain” investing, when you might act mainly out of instinct, a disciplined approach is a pre-set investing pattern that you commit to follow.

It may not be as much fun as acting out of intuition. And it may involve digesting some pride. But disciplined investing could help keep you out of serious trouble, even while positioning you well in the market.

Deciding on Dollar Cost Averaging

Instead of trying to guess market highs and lows — a feat no one has ever really mastered — why not invest the same amount of money in a mutual fund at regular intervals over a lengthy period of time?

For example, let’s say you set aside $200 every month to invest in a fund. The first month, your fund sells for $10 per share, and you pick up 20 shares. By the next month, the market’s down, the fund drops to $9 per share, and you buy 22.2 shares. The next go round, the market regains lost ground and the fund is back up to a $10 share price. You pick up another 20 shares.

So what’s happened up to this point? The bottom line is that the average share price was higher than your average share cost. That’s because you bought fewer shares when your stock was higher and more when it was lower. And that’s the very essence of dollar cost averaging.

But It Will Only Work If...

This is a long-range plan, as is hinted at by the word “averaging.” In other words, the technique’s best use comes only after you’ve stuck with it for a while.

Patience and persistence are the operative words here. Don’t let the market rattle you into changing your battle plan.

When other panicky investors are scrambling — wanting out of the market because it has declined, wanting into it when it has risen — you’ll just keep investing a set amount every month or quarter or whatever interval you’ve set.

Note: Dollar cost averaging does not assure a profit and does not protect against a loss in declining markets. This type of investment program involves continuous investment in securities regardless of fluctuating price levels of such securities. Investors should consider their financial ability to continue their purchases through periods of low price levels.

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