Don't Sacrifice Growth for Stability of Principal

What percentage of your money should be invested

in common stocks or stock mutual funds?  One financial

expert suggests a simple formula of subtracting your

age from 100 to determine the appropriate allocation of

investment dollars to equities.  For example, if you

are 50, half your investments should be in common stock

or stock mutual funds.

However, most people have much less invested in

equities than they should.  Of all mutual fund

investments, 70.5 percent are in bond funds and money

market funds; only 29.5 percent are in equities.

Retirees often have their money too conservatively

invested, thinking only about stability of principal.

Even young people often have too large a portion of

their portfolios invested only in fixed-income

investments, which traditionally have yielded much less

than common stocks.

No one should have all of his or her investments

in growth securities.  However, it is equally dangerous

to be totally invested in short-term income securities.

For example, in 1981, $250,000 invested in certificates

of deposit would have provided more than $3,000 of

income each month.  Today, just 13 years later, that

same nest egg would yield less than $700 in monthly

income.  Although the principal has remained safe,

monthly income has decreased more than 75 percent,

while inflation has continued to increase the cost of living.

Although common stocks and stock mutual funds

offer some short-term market risk, serious, long-term

investors know that equities also offer the opportunity

to stay ahead of inflation and keep income growing.

Staying ahead of inflation is particularly

important to retirees.  Today, a 70-year-old has a 63

percent chance of living another 15 years.  Inflation

as low as 3 percent annually will reduce purchasing

power by more than half in those 15 years.  Selecting

only fixed-income investments may not allow investors

to stay ahead of inflation.  Common stocks of large

corporations, on the other hand, have yielded an

average of 6 percent more than inflation since 1926.

If you are heavily invested in fixed-income

securities such as U.S. Treasuries or CDs, and you want

to add some growth to your portfolio, how should you

begin?  First, don't try to do it all at once.  Early

redemptions could cost you penalties.  Plan ahead, and

find out when your securities mature.

Next, decide how much of your portfolio should be

invested in common stocks or equity mutual funds.  As

your securities mature, or as new money becomes

available, gradually move it into the new investments.

Typically, taking one to two years to adjust your

portfolio is best.  This allows for market fluctuations

and reduces your exposure to unexpected drops in the

market.

Selecting only fixed-income investments may avoid

the risk of losing principal, but it also may expose

you to the biggest risk of all -- outliving your nest

egg.  Don't forget about the importance of growth and

staying ahead of inflation when choosing your

investments.