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How To Craft a Wealth-Preservation Strategy
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Business New Haven
11/10/2003
By: Karen Singer
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It's easy for investors to get caught up in the short-term fluctuations of the market or enticed by allure of trendy stocks. But they shouldn't forget the fundamental principles of building wealth and preserving capital favor a disciplined, long-term strategy.
The aim is to devise a portfolio reflecting an investor's long- and short-term objectives.
This involves setting goals, assessing risk (not to mention your risk tolerance) and devising a plan.
Although the do-it-yourself approach was in vogue during the high-flying 1990s, more investors these days are seeking professional help, especially if they have at least $100,000 they'd like to grow.
In addition to investment guidance, financial advisers can help business owners with cash management and other financial matters.
Investors seeking comprehensive management services can expect to pay a percentage of their assets, depending on the size of the account. A $1 million account, for example, may cost one percent annually.
One of the first steps in the process is to take stock of your assets. It's hard to figure out how much money you're able to invest until you've determined how much you have and where your assets are located. It's not uncommon for potential investors to be so preoccupied making money at their business or profession that they have no idea of their net worth, which may be scattered in multiple places.
Identify your time frame. Financial advisors recommend long-range investments of at least five years, and preferably ten years or more. Figure out what kind of return you will need to sustain - or upgrade - your lifestyle.
A 40-year-old investor with heirs, for instance, may have very different needs than a 60-year-old single investor.
Wealthy investors age 50 or older may also want to consider looking into estate planning and long-term health care, as part of their overall financial needs and goals.
Assess your level of risk tolerance, which means more than identifying how much money you can stand to lose. It also has to do with the amount of market volatility you can handle as you watch your account balance fluctuate over time.
Once you've set your expectations and know why you're investing, you're ready to build a diversified portfolio of various types of stocks, bonds and cash.
When it comes to stocks, financial experts say, quality is king. Look for companies with a solid track record of earnings and growth. Those offering dividends are regarded as a good bet these days, in light of recent federal changes reducing tax on dividends to 15 percent instead of your income tax rate, which may be considerably higher.
Mutual funds are generally regarded as less desirable for investors who already are wealthy, primarily because of the fees involved and lack of control.
Upscale earners also should have tax-free bonds as part of their portfolio, in taxable accounts, and taxable vehicles in pension funds and IRAs, which are either non-taxable or only subject to tax at the time of withdrawal. Be sure to diversity by duration, or maturity.
Cash options could include short-duration bonds, CDs or U.S. Treasury Inflation-Indexed Securities (TIPS), which are designed to keep pace with inflation. The principal amount invested is adjusted over the life of the bond based on the changes in the consumer price index, and the adjusted principal amount is paid to investors at maturity.
The aim is of diversification is to cover enough subsets and varieties of asset classes that when one asset class is doing poorly, another is thriving.
Consider contributing regularly to your portfolio, as early as possible, which is likely to help it grow faster.
Revisit your portfolio periodically, to determine whether you're still on track toward your goals, and rebalance it if necessary.
If your net worth is in excess of $1 million, it may be a good idea to meet quarterly with your adviser. In any case, be sure to take a comprehensive look at your portfolio at least once a year.
Major life changes, such as death, divorce or marriage also ought to prompt a portfolio review.
Rebalancing may involve reducing or eliminating investments, which could trigger tax consequences.
Ideally, you should be able to develop a close, trusted relationship with a financial adviser that lasts for years. Despite the bad rap the industry has received, in light of recent scandals, advisers point out their industry is one of the most regulated in the country.- Karen Singer
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