Alpha Teach Yourself Investing in 24 Hours: An Analysis (part 43)

Long-Term Investment Objectives

by

Charles Lamson

Long-term objectives are investments of 10 years or more. For many of us, retirement planning will be at the top of our long-term investment objectives. You may have others that are long-term.

PROCEED WITH CAUTION Mapping out objectives and strategies to achieve them is an ongoing process that is always being refined and returned.

Ages 20-45

In earlier posts, we noted that the more time you have to reach a goal, the more aggressive you could be in your investment decisions. People within this age range have many years before retirement, so they can be very aggressive in their fund selection, taking into account their own tolerance for risk.

JUST A MINUTE Small-cap funds can be like cheap fireworks. They have an equal chance of eith shooting straight up in the air or blowing up in your hand.

A single person, age 20, would probably want to charge the market with a small-cap growth fund in his or her retirement account. These funds are not normally tax efficient so they are better suited to tax-deferred retirement accounts.

A company's market capitalization is the market value of its outstanding shares. The definition of small cap can vary among brokerages, but it is generally a company with a market capitalization of between $300 million and $2 billion.

Small-cap funds have the largest potential for growth, but also carry the highest risk and are noted for their volatility. These are not funds for short-term investing.

A mid-cap fund is a type of investment fund that focuses its investments on companies with a capitalization in the middle range of stocks in the investable market. Companies with market capitalizations ranging from $2 billion to $10 billion are typically considered mid-cap companies.

A more moderate approach would be to buy medium-cap funds in the growth area and a more conservative approach would consider large-cap growth funds.

Large cap (sometimes "big cap") refers to a company with a market capitalization value of more than $10 billion. Large cap is a shortened version of the term "large-market capitalization." Market capitalization is calculated by multiplying the number of a company's shares outstanding by its stock price per share.

If you want to follow the path of least resistance (and least work on your part), pick an index fund, such as one that follows the S&P 500. This type of fund would be a large-cap blend, because the S&P 500 index is primarily large-cap stocks. Within the 500 are some value stocks as well as growth stocks.

Ages 45-55

At this point in your life, retirement, while still a long way off, may seem to take on more importance. This would be a good time to consider moving out of the highest risk funds and into areas of more moderate risk, but still plenty of room for growth.

Trading small- and medium-cap growth funds for large-cap stock funds will begin to bring stability to your portfolio and let you begin planning your retirement with more accuracy.

Income funds in your retirement account toward the end of this period also add a degree of predictability to your retirement.

PROCEED WITH CAUTION Compounding over a long period is like a ball rolling downhill. The closer it gets to the bottom, the faster it goes. What started out as compounding a small amount is now compounding a large amount. Do not turn off compounding too soon.

Ages 55-65

Although the last 10 years before your retirement should be a time for consolidating your portfolio into a shape that will serve your daily income needs in retirement, most financial professionals caution against pulling too far back.

 For one thing, if you have been diligent about funding your retirement account, it is probably quite large by now, and the additional compounding will be significant the last 10 years.

Another concern is that there is a good chance, thanks to modern medicine that you will live some 15-25 years after you retire. Putting the breaks on your retirement earnings too quickly may put you in the uncomfortable position of outliving your money.

For example, if your retirement fund is $750,000 and it is earning 10 percent per year, you are making $75,000 in interest before taxes. If you pull back to safer investments to protect your retirement and are only earning 6.5 percent, your annual before tax income is only $48,750, or a loss of $26,250. That can mean a substantial difference in how you live out your retirement.

An income fund is a type of mutual fund or exchange-traded fund (ETF) that emphasizes current income, either on a monthly or quarterly basis, as opposed to capital appreciation.

Many people suggest shifting intro more income-oriented funds during this period to smooth out the peaks and valleys. At this point, you probably do not want to be in anything but large-cap funds, with a stronger emphasis on bond funds than stock funds.

*SOURCE: ALPHA TEACH YOURSELF INVESTING IN 24 HOURS, 2000, KEN LITTLE, PGS. 255-257*

END

PROCEED WITH CAUTION

Mapping out objectives and strategies to achieve them is an ongoing process that is always being refined and returned.

JUST A MINUTE

Small-cap funds can be like cheap fireworks. They have an equal chance of eith shooting straight up in the air or blowing up in your hand.

PROCEED WITH CAUTION

Compounding over a long period is like a ball rolling downhill. The closer it gets to the bottom, the faster it goes. What started out as compounding a small amount is now compounding a large amount. Do not turn off compounding too soon.