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Articles: Stick to three R’s in investing

When you were growing up, your parents and teachers may have preached the value of learning the “three R’s.” According to the oftcited expression, “reading, ‘riting and ‘rithmetic” were the basic skills needed for a sound education.

Undoubtedly, a lot has changed in your life since then. However, as an adult investor, you may be advised to follow another three R’s: researching, reviewing and reallocating. Here is a quick rundown of these principles.

1. Researching:  Before you invest any funds, diligently research the investment. For instance, do not give short shrift to an offering prospectus. Dig in until you truly understand the terms and the nature of the investment.  Naturally, you will not want to invest in any fly-by-night companies or issuers without a proven track record.

2. Reviewing: Next, it is important to review your portfolio in light of the investments you are currently contemplating. If you adhere to the basic investment principles of diversification and asset allocation, you will want to examine the breakdown after you have made the investments. Are the investments you are considering in line with your objectives for the future and your tolerance for risk? If not, it may be wise to pass on the opportunity.

3. Reallocating:  After thoroughly researching the investment and reviewing it, you may decide to go ahead with the transaction.  In that case, the addition to your portfolio may throw your preferred mix of assets out of kilter. Furthermore, even if you do not change the mix of assets through a purchase or a sale, one type of investment may have increased or decreased significantly in value. Thus, it may be time to rebalance your portfolio.

Hypothetical example: Suppose your personal investment strategy is to keep about 70% of your portfolio in stocks, 20% in bonds and the remaining 10% in cash equivalents (e.g., money-market funds). Over the last few years, the value of your stocks has dropped to 55% while the value of the bonds has increased to 30%, and the value of the cash equivalents has risen to 15%. Based on your preferred allocation, you may decide to direct more funds into stock investments showing a potential for future growth.

Of course, this simplified example is just an illustration and is not indicative of any preferred asset allocation mix or the performance of any particular investment. A reallocation of assets is not a guarantee against loss in a declining market. Finally, be aware that rebalancing your portfolio may result in income tax consequences (e.g., capital gains realized on the sale of investments).

This newsletter/advertisement is produced for our clients, friends and associates through an arrangement with WPI Communications, Inc. for the representatives’ use. Although the editorial content is professionally researched, written and edited, neither our firm nor any of its agents, representatives or associates make any representations regarding the accuracy of the content or its applicability to your situation. The information in this communication is not intended as tax or legal advice. In accordance with IRS Circular 230, the information provided herein may not be relied on for purposes of avoiding any federal tax penalties. Any tax advice contained in the body of this material was not intended or written to be used, and cannot be used, by the recipient for the purpose of 1) avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions, or 2) promoting, marketing or recommending to another party any transaction or matter addressed herein. You are encouraged to seek tax or legal advice from an independent advisor.


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