Published February 2005

Time-tested investment strategies for 2005, beyond

As an investor, you’ve got a lot of questions. How will the markets do in 2005? Will the economy prosper? Where will interest rates go? These issues are not meaningless — but if you really want to work toward achieving long-term investment success, you’ll look past short-term factors and follow some “time tested” investment strategies.

Here are 10 key principles to consider:

• Stick with your investment plan. If you adjust your investment plan, do it for the right reasons, such as a change in the long-term outlook for one of your investments or the realization that an investment no longer meets your goals.
• Diversify and rebalance. By spreading your money among a variety of investments that may rise and fall at different times, you’ll avoid taking those big “hits” that may affect just one asset class. You also may need to “rebalance” your holdings occasionally to make sure the percentages of your portfolio taken up by different assets still fit your risk tolerance and time horizon.
• Reduce the size of an investment that’s too large. If you put a large amount of money in a single stock, for example, you are taking a substantial risk. With the capital gains rate now at a maximum of just 15 percent, you have a good opportunity to sell off shares of a stock and help diversify your portfolio. Having too much in one investment is a risk that may not be worth taking.
• Keep investing. Although past performance is no guarantee, over the long term, stocks have significantly outperformed all other asset classes. So, keep investing in high-quality stocks and don’t get dissuaded by short-term “bumps” along the way.
• Look for rising income opportunities. To boost your investment income, consider buying stocks that have historically increased their dividend payouts. And dividends are now even more attractive, because they are taxed at a maximum rate of just 15 percent. (Keep in mind, though, that stocks are not fixed-income investments and may not pay dividends.)
• Don’t forget “growth and income.” Many investors are attracted to the potentially high returns of “growth” and “aggressive growth” stocks. But there’s almost certainly a place in your portfolio for good, solid “growth and income” investments, which provide opportunities for capital appreciation and current income.
• Limit exposure to risky investments. Be cautious about investing in emerging markets, “junk” bonds, technology stocks and commodities such as oil and gold. Before adding these volatile investments to your portfolio, consult with a financial professional who knows your needs and risk tolerance.
• Build a “bond ladder.” By building a “ladder” consisting of bonds of varying maturities, you can help to protect yourself in all interest-rate environments. When market rates are low, you’ll have your high-rate, long-term bonds working for you. Then, if rates rise, you can reinvest the proceeds of your short-term bonds into new bonds issued at the higher rates.
• Reinvest, reinvest, reinvest. If your investments generate dividends or interest that you don’t need to meet monthly expenses, consider reinvesting that income to put the power of compounding to work.
• Follow principles, not predictions. No one can predict with total accuracy what 2005 (or future years) will bring to the financial markets. So, stick with the investment principles that never go out of fashion, such as diversification, investing in quality and maintaining a long-term perspective.

By following these 10 basic strategies, you can help yourself make steady progress toward your financial goals in 2005 — and beyond.

Eric Cumley is a Certified Financial Planner and investment representative with Edward Jones in south Everett. He can be reached at 425-353-2322. Edward Jones is an NYSE-member investment firm with more than 9,000 offices nationwide.

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