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You Asked, We Answered…
My Bonus Is Bigger Than I Expected! What Do I Do Now?
Start Learning About Investing, Says This Financial Adviser
By Carolyn Curci Q: I recently received a $7,000 performance bonus from my company. How should I invest it wisely?
Not only are more and more women finding themselves responsible for their finances at one time or another, but women face a unique challenge. As a result of spending less time in the workforce historically, as a group they are at a disadvantage when it comes to retirement resources. To make matters worse, because they tend to live longer, women also need their assets to stretch over more years. You can take full control of the most important means of retirement financing by developing a personal savings plan. With that in mind, where should you invest that $7000 bonus? I've broken the process into three simple steps. First, set your goals. Second, allocate your assets. Third, put your plan into action. Step One—Setting Your Goals Determine where you are—assess your net worth. Then decide where you want to be in the short term, or one to three years (should you create an emergency reserve?); in the mid term, or three to seven years (want to start a home owners or college fund?); and in the long term, seven years and beyond (college or retirement fund?).
Step Two—Allocating Your Assets Once you define your goals, you can begin to think about the types of investments you want to consider, as well as how you'll divide your assets among them.
It's called asset allocation, and it may be the most important investment decision you make. In fact, of all the factors that go into planning an investment portfolio—including market timing—how you allocate your assets is the most important. According to a study by Ibbotson Associates, an investor's asset allocation policy is responsible for 90 percent of her return. Here are your choices. Generally, there are three categories of investments:
First, there are investments that seek to provide a safe harbor for money you'll need in the near term, and they are called "cash equivalents.” Cash equivalents are usually very liquid, or easy to access, and they involve little risk.
Next, there are investments that provide regular income. They are called "income investments.” And finally, there are investments that help your assets grow in order to stay ahead of inflation. These are called "growth" investments. By diversifying your assets among these three investment categories, you increase the chance that part of your portfolio will be growing at all times and decrease the chance that adverse market conditions will impact all of your holdings at the same time. Think of it as not putting all of your eggs in one basket.
Now, we'll talk about how the different categories of investments—cash, income and growth—translate into actual investment securities, or asset classes.
Basically, growth usually means stocks, income means bonds, and cash equivalents are savings vehicles like money-market accounts. Because they have different characteristics and tend to perform differently as economic environments change, each asset class is an important component of a well-balanced portfolio.
Step 3—Putting Your Plan into Action My recommendation: Make it easy on yourself—consider mutual funds. Their advantages include built-in diversification, professional management, affordability and liquidity.
Built-in diversification: Because they usually have millions in assets, funds can invest in many different securities from different industries, companies, even countries. It would be difficult for an individual investor to achieve such broad diversification potential on her own. Remember that diversification is one of the key ways to help reduce overall investment risk. In addition, should your investment needs change, most mutual-fund families allow you to exchange into another fund in the family for free.
Professional management: With most funds, a team of expert analysts and portfolio strategists are on the job watching the markets and the fund's investments and locating assets accordingly—buying or selling securities to meet the challenges in the marketplace.
Affordability: Many funds accept low minimum investments. For example, it takes only $500 to open most mutual fund accounts, and only $50 for IRA accounts.
Liquidity: Although best considered for longer-term investments, mutual funds are very liquid. That is, you may redeem your shares for their current value on any business day. Of course, your proceeds may be worth more or less than the original price on that day.
To summarize, I’d recommend that you establish specific, measurable and achievable goals. Consider equity investments to help stay ahead of inflation and maintain buying power for the 20-plus years of retirement that await you. Make investing easy on yourself by investing in mutual funds, at least for starters. Set up a systematic plan of contributing to your fund. Consult with an investment professional, and periodically review your asset allocation strategy with your investment representative. She will, no doubt, understand what your needs and concerns are. _____________________________________________
Carolyn Curci is a Vice President and Financial Adviser with Janney Montgomery Scott. You may contact her at ccurci@jmsnonline.com |
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