2007 Consumer Reports Ultimate Money Guide (III) - Investing & Goals

This is the third part of the 2007 Consumer Reports Ultimate Money Guide. The first two parts discussed shopping & spending and borrowing & debt. This part focuses on investing related issues.

Steps to a golden financial future

• Mind your spending: Create a spending plan to track monthly spending. If spending exceeds income, find ways to cut spending.
• Weigh your dreams: Jot down major financial goals and figure out how much is needed at specific times.
• Shave and save: Cut back on expenses and save each month in appropriate accounts in order to achieve goals.
• Know the deals: Know the pros and cons of each account: 529, 401(k)/Roth 401(k), and IRA/Roth IRA.
• Rainy day money: Plan for the uncertainty before it happens. Set aside three to six month’s worth of asset to cover the unexpected events.
• Ditch the debt: Use low-rate credit cards and pay off balance every month.

Tricks for financial do-it-yourselfers

• Investing: Consult a financial adviser to setup a portfolio, then manage and rebalance it on your own instead of hiring a pro to do the job for you.
• Real estate: Sell your home by yourself to save on commissions.
• Estate planning: Check out www.lawdepot.com for boilerplate forms instead of hiring an attorney if your financial life is simple. But consult an attorney to make sure the forms are correctly filled out.
• Taxes: Use tax preparation software to do your own taxes.

Keep pace with market indexes

• Determine how much you will be comfortable with stocks, bonds, and cash. Check out www.mfea.com for sample allocation.
• Setup a well diversified index fund, or multiple index funds, to cover large-, mid-, and small-cap stocks.
• To further diversify, consider investing 10% in foreign large-cap stocks to gain international exposure.
• Invest the rest in intermediate term bond fund.

How to beat market indexes

• No-load: Look at no-load funds only.
• Low-fee: Identify those with lowest expense ratios.
• High-asset: Keep those with the most assets under management.
• Long-tenure: Get rid of funds whose manager’ tenure is less then two years.

How many funds are enough

Experts generally believe that five to eight mutual funds are enough to balance the risk and return.

• Core portfolio: A basic mix includes a large-cap fund, and a mid-cap, small-cap, international, and bond fund.
• Tweaking the core: Hold no more than 30% in each category and split the investments between growth and value funds.

Where to hold different bonds to pay less taxes

• Taxable account: Tax-free municipal bonds or municipal-bond funds.
• Retirement account: Taxable bonds and bond funds.

Costly investment mistakes

• Paying high fees: Get a full disclosure of fees/charges from your broker or money manager. Every dollar saved on fees can be invested for long-term growth.
• Ignoring spousal plans: Your investment portfolio and your spouse’s portfolio should be integrated and work together.
• Owning dud annuities: Be careful with deferred annuities. Not only they have annual costs, but also charge surrender fees if withdrawing with a few years after purchase. A deferred annuity only makes sense if all other investment plans are exhausted and withdrawals won’t be taken for at least 15 years.

Better way to buy a 529 plan

• Go directly to the plan manager instead of dealing with an investment adviser or broker.
• Find information on 529 plans at www.savingforcollege.com or www.morningstar.com.

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