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Life After 10,000After plumbing the depths for the past several months, the Dow Jones Industrial Average is once again near 10,000.1 It's a milestone that many experts have come to see not just as a measure of a prosperous market, but as an important psychological signpost as well.When you consider the economic and political conditions that have been present since the Dow sunk below 10,000, it’s easy to see why this threshold has come to represent a dividing line for many investors. From April 1999 until about mid 2001, a time of relative prosperity, the Dow was solidly in 10,000 territory. It dipped below 10,000 occasionally during those years but never for very long, even as the economy began to slow down in 2001. In the days after September 11, 2001, the index plunged into the low 8,000s, but managed to exceed 10,000 a handful of times over the next year.2 The last time the Dow exceeded 10,000 was in May 2002. When it fell, it stayed below 10,000 longer than any other interval since it first broke the barrier in 1999.3 Many investors, fearful of declining stock prices, pulled back, put their plans on hold and put the brakes on new money flowing into the markets. But as the markets appear to regain momentum, it may be time to refigure and reposition. If you battened down the hatches on your portfolio to ride out the bear market, you may want to consider making some adjustments to take advantage of the potential for a rising tide. Asset Allocation One common strategy during the bear market was to sell stocks in favor of more conservative cash equivalents and debt instruments. This might have been a dash to safety, but with these accounts returning in the low single digits, overly conservative investors may now run the risk of underperforming their expectations and not reaching their long-term goals. For example, over the four decades between 1962 and 2002, stocks returned an average of 10.5% per year compared with 7.7% for bonds and 6% for cash equivalents.4 Of course, the closer you are to retirement, the more you may want to shelter your portfolio from the risks of the stock market. Any decision to invest in stocks should be based primarily on your time horizon, risk tolerance and personal goals. Tax Planning Now that the 2003 tax law is in effect, you might want to take a second look at how your assets are allocated among various investment vehicles. Long-term capital gains and qualified stock dividends are now taxed at a lower rate than income from bonds. However, distributions from tax-advantaged accounts such as 401(k) plans and IRAs will continue to be taxed as ordinary income, regardless of the type of underlying investment.5 This development may prompt some individuals to reconsider how they balance equity and bond instruments inside tax-deferred and taxable accounts. After a long bear market, the prospect of committing new money to equities might seem risky. However, by taking a long-term view and carefully choosing the appropriate asset allocation, you may be able to take advantage of potential growth in the financial markets. 1-3) Yahoo! Finance, 2003. Performance described is for the periods 7/1/2003 to 7/31/2003, 4/1/1999 to 9/30/2002, and 3/29/1999 to 7/31/2003. The performance of an index is not indicative of the performance of any particular investment. Individuals cannot invest directly in an index. Past performance is no guarantee of future results. 4) Wiesenberger, 2003. Performance described is for the period 12/31/1962 to 12/31/2002. Stocks are represented by the S&P 500 Composite index total return, which is generally considered representative of the U.S. stock market. Bonds are represented by the Salomon Brothers Corporate Bond Composite Index, which is generally considered representative of U.S. corporate bonds. Cash equivalents are represented by the average annual yield on three-month Treasury bills, which are backed by the full faith and credit of the U.S. government as to the timely payment of principal and interest. The performance of an index is not indicative of the performance of any particular investment. Individuals cannot invest directly in an index. Past performance is no guarantee of future results. 5) Distributions from traditional IRAs and employer-sponsored retirement plans are taxed as ordinary income and, if taken prior to reaching age 59½, may be subject to an additional 10 percent federal tax penalty. © 2003 Emerald Publications |
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