Issue 15 - December 2003

Are you investing for your future?
3 things to consider
By Craig S. Donner, DC

Do you “save” or “invest”? Saving is setting money aside in a secure location for a certain need or desire. Investing entails putting money to work toward achieving a financial goal with the possibility of generating a return.

If you are an investor, you want your investments to:
• Meet both short-term and long-term investment objectives; and
• Work for you within your tolerance for risk.

And as an employer — and tax payer — you’d like to keep your tax bill to a minimum.

Here are three things to consider as you invest in your future:
• Asset allocation;
• An investment strategy; and
• An employer-sponsored retirement plan.

Asset allocation

Asset allocation is a disciplined, objective investment game plan. Many financial professionals believe the asset allocation decision is the most important step in the investment process because through asset allocation, you invest regularly. Regular investment tends to offset the vagaries of the stock and bond markets.

A simple asset allocation model for an individual investor generally requires a portfolio of assets divided into three categories — stocks, bonds and cash. Each allocation is assigned a fixed percentage.

Based on this strategy, a conservative portfolio would generally contain more bonds and cash than stocks. A more aggressive portfolio might contain a higher percentage of stocks.

Since diversification of assets is generally recognized as a reliable way to reduce and manage risk in a portfolio, the mix of assets in your allocation model should reflect your preferred level of risk. Considerations such as current spending requirements, tax implications and inflation-adjusted return may also be addressed through the asset allocation process.

You can change your allocation as your life cycle changes. In most cases, the longer your investment time horizon, the more aggressive your investment strategy might be.

For example, investors in their 30s and 40s tend to have several needs and concerns in common (for example, children, a new home, college education and retirement planning). To address these concerns, an asset allocation plan that emphasizes stocks is often recommended because they historically have provided superior returns over time.

At the other end of the spectrum are investors who are close to or who have entered into retirement. Their goal might include providing enough income to maintain a lifestyle or growth of their capital to ensure that they do not outlive their assets. For these investors an above-average holding in bonds may be recommended.

Obviously, these are guidelines. When implementing as asset allocation strategy, the various percentages allocated to stocks, bonds and cash should be assessed on a personal basis and reassessed annually.

Investment Strategies

Deciding to invest through asset allocation is the first big step to assuring your financial future. But to get the most for your money, you need to decide on an investment strategy.

You can choose from a number of strategies, including tax-free investing (such as through municipal bonds), tax-deferred investing (retirement accounts or annuities), stock portfolios, bond portfolios (taxable and tax-free), REIT’s (Real Estate Investment Trusts), preferred stock and alternative investments such as hedge funds.

The last few years have taught us that investing in stocks has proven to be risky if the investor does not have a time horizon of at least five years. The impact the new tax law has on your investment process can be quite significant, especially if your portfolio includes blue chip and income stocks. These stocks are generally purchased because a large component of their total return comes in the form of consistent and steady dividend distributions.

Under the new tax law, the top tax bracket for qualified dividends has been dramatically reduced. In fact, the new dividend tax law may have cracked one of the old cornerstones of the accumulation phase in financial planning. In the past, it was tax savvy to hold an investor’s dividend paying stocks in their tax-deferred accounts such as an IRA or 401(k). That old cornerstone may need to be adjusted. It may now make more sense for a given investor to hold bonds and other fixed income investments into IRA and 401(k) accounts and hold dividend paying stocks into taxable investment accounts to take advantage of the new lower tax rates on dividends.

As always, in making any investment decision, you should not let the tax tail wag the investment dog.

Best tax breaks

Another consideration in investing for the future is avoiding taxes. As an employer you can take advantage of a number of tax breaks by providing a retirement plan for yourself and your employees.

Fortunately, you can choose from among several different types of retirement plans, all of which provide tax advantages. Some of the plans include as the Simplified Employee Pension (SEP); 401(k); Safe Harbor 401(k); One Person 401(k); SIMPLE IRA; Profit Sharing Plan; and Defined Benefit Plan. The features of a particular plan can be matched to the needs of your practice, depending upon the size of your business, maximum annual contributions, employee eligibility requirements and deadlines to establish the plan and then fund the plan.

Dr. Craig S. Donner, associate vice president of investments for Raymond James & Associates, is a 1990 graduate of Life Chiropractic College and was in a private practice until 1997, when he decided to focus his career on wealth management, asset protection and tax minimization strategies He can be contacted at 800-261-1035 or by e-mail at Craig.Donner@ RaymondJames.com