Don't Mess With Taxes

With the markets soaring thanks to yesterday's federal funds rate cut, it seems a good time for some cautionary words before we all go jumping into the deep end of the investment pool.

I ran across a release from the Colorado Society of CPAs with tips on managing your retirement portfolio. Since most financial gurus say your involvement with equities should be for the long haul, these eight questions should benefit us all, even for funds that aren't strictly for our post-work years.

So here goes:

1. Do I have a plan in place for investing regularly?
The key to a successful retirement saving strategy is to make systematic investments throughout your working life. The easiest way to do this is to make saving automatic. If you have an employer-sponsored retirement plan, your contribution may be deducted from your paycheck, so you can save regularly and easily. If you don't have a workplace plan, consider setting up an individual retirement account, Keogh, or Simplified Employee Pension (SEP) automatic investment program with a bank, brokerage, or mutual fund company.

2. Am I investing for long-term growth?
Just as important as investing regularly are the investment choices you make. Retirement saving means investing for the long term. Historically, stocks have had the best chance of achieving high returns over long periods. Over the years, inflation can erode the purchasing power of portfolios that are too highly weighted in bonds and certificates of deposit.

3. Do I know my tolerance for risk?
Risk is the price you pay for potential return. Generally, the more risk you take with your money, the greater the potential return or loss. However, the less risk you take, the lower the potential return and the lower your risk of loss. An honest assessment of your risk tolerance leads to a successful asset allocation strategy.

4. Do I have the right asset allocation?
How your money is divided among the different classes of investments -- stocks, bonds and cash equivalents -- can have a more significant impact on your return than the actual stocks and mutual funds you choose. Remember, no one mix of assets is right for everyone all the time. Each investment you select should be part of an overall asset allocation strategy that is tailored to your specific goals, risk tolerance, and financial situation.

5. Is my portfolio diversified?
Diversification is a risk-management technique that takes asset allocation one step further by ensuring a balanced portfolio within each asset category. This is especially important in your stock portfolio. Your stocks should represent different sectors, industries, companies, and geographic areas. In your fixed-income portfolio, you can further diversify by structuring your investments so that they have differing maturity dates.

6. Do I have sufficient liquidity?
It's generally a good idea to set aside a portion of your retirement savings in a money market fund or savings account. Should you find yourself in an extended bear market, you can withdraw cash from your liquid investments rather than sell off assets at an inopportune time.

7. Am I monitoring and rebalancing my portfolio?
Active, regular portfolio review is essential for evaluating the performance of your investments and determining whether any actions are necessary. Monitor the companies in which you have invested. Bear in mind that as some asset classes perform better than others, your asset allocation can become unbalanced.

For example, let's suppose you allocated 50% of your savings to stocks, 30% to bonds and 20% to cash. If, after 12 months, you notice that your stocks have grown to become 55% to 60% of your portfolio, it's time to rebalance.

Remember, though, monitoring doesn't mean you need to spend 12 hours a day tracking your investments. There is such a thing as overkill. If you've invested for the long haul and have recently rebalanced or diversified your portfolio, you should be in good shape to weather the expected ups and downs of the market.

8. Am I getting the professional help I need?
OK, this question is an obvious plug for Colorado CPAs, but the point is a good one. Managing your retirement assets is a dynamic process that will evolve over the stages of your life. Unless it's your job to follow the market, you'll likely need some help in making the proper portfolio changes.

In short, invest adequately and regularly, diversify your portfolio and keep tabs on your investments. That way, you should have plenty of money to do what you want, when you want.