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Making Your Money Work Harder

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When it comes to finances, many teachers are disciplined savers. They protect what they already have by contributing regularly to their tax-sheltered annuities through payroll deductions and banking money each month for future needs. Fewer teachers make the leap into the world of investing, perhaps because they believe they have neither the money nor the skills to operate in the realm of Wall Street wizards. But even people with average paychecks and modest fiscal know-how can benefit from investing--using the money they already have to make more.

Selecting an appropriate investment strategy from all the available choices is perhaps the most difficult part of getting started. Before doling out a single dollar, you should consider several important questions.

1. What are my financial goals?

Are you planning to buy a new car, build a new house, gear up for retirement? Each ambition calls for a different investment approach.

To determine what's best for you, start by writing down your short- and long-term goals. Set target dates for achieving them and figure the amount you would need in today's dollars to do it. For example, you might want to buy a car in 1991 for $10,000, send your son or daughter to college beginning in 1996 at a total cost today of about $50,000, or retire in 2005 on $40,000 a year. Assign some portion of your current income (or any investments you may already have) to meeting each goal. Popular financial books and magazines often include worksheets that can help you calculate how much you'll need to save toward longer-term goals such as college and retirement.
2. What investments are likely to meet my goals?

Each investment option you choose should meet one or more of your objectives. Following are the four most common ones. Typically, one of these will be your primary objective, with others playing a less important role. (For a list of some common investment options, see "Financially Speaking,'' below.)

Liquidity: the characteristic of an asset that permits it to be converted to cash quickly at or near your purchase price. Every investor needs a certain amount of liquidity as a cash reserve for emergencies, planned expenses, and investment opportunities. Examples of liquid investments, most of which pay a fixed or variable rate of interest, include checking and savings accounts, bank certificates of deposit (CD's), and money-market mutual funds.

Safety of principal: a reasonable assurance that you will not lose your initial investment. This is most important when you need your capital on relatively short notice or are depending on it for retirement income to replace current earnings. "Safe'' investments may fluctuate in value during the holding period as interest rates rise and fall, but they will usually return the principal. Most pay interest at a fixed or variable rate. Examples include bank accounts and CD's; moneymarket funds; government-backed bills, notes, bonds, and mortgages or funds investing in these; high-quality corporate and municipal bonds or bond funds; and fixed-rate annuities. Long-term bonds--25 to 30 years-- generally beat inflation by 2 to 3 percent annually.

Current income: investments with high annual yields. These appeal to people who depend on investment income to meet current expenses, such as retirees. High-yield investments are usually riskier than those listed above. They include the so-called "junk'' bonds or bond funds, convertible bonds or funds, and preferred stocks or funds. Current income on these options usually beats inflation by 5 percent or more, but the bond's principal may lose value if the organization that issued it has financial trouble.

Capital appreciation: the increase in market value over the original investment. This is a consideration valued most by people for whom income concerns are not immediate. Tax is deferred on capital gains until the investment is sold. Generally, investments that focus on capital appreciation perform best if held for several years or more. Examples include stocks and stock funds, real estate, variable annuities, gold, and collectibles. Long-term total returns (capital gains and dividends) historically have outperformed inflation by 9 to 12 percent per year.

3. How much risk should I take with my investment?

Every investment carries some risk. Generally, the greater the risk you are willing to take, the greater the potential payoff--or loss. The most common risks to investments are:

Interest-rate risk. With an investment such as a bond or CD, you may lose either some of the interest, part of the principal, or both if you sell it prior to maturity. Or, if you do hold it to maturity, you risk cashing it out at a lower interest rate than is currently being offered. For example, if you buy a five-year CD locked in at 8 percent interest and interest rates rise to 10 percent during that period, you lose the opportunity to earn the higher rate on your investment.

Market risk. Political, economic, and social events can affect investments regardless of their intrinsic value. An investment tied to South Africa, for instance, is likely to be affected by anti-apartheid sentiment.

Business risk. Stocks issued by businesses may underperform similar investments if the businesses don't meet expected profit levels. If a company reports lower-than-anticipated earnings for one or more quarters, for instance, its stock will probably lose value.

Purchasing-power risk. Inflation may erode the purchasing power of investments or their income. Passbook savings accounts are a prime example. After paying tax on the interest and after factoring in inflation, you are likely to lose real value.

Your best bet to reduce risk is through diversification--spreading the risk across different types of investments so you're not betting too heavily on one type. Also, diversify within each investment category--own several stocks or bonds, or, even better, put your money in professionally managed mutual funds that diversify their investments. No investment comes with a guarantee, so be sure to understand and feel comfortable with the risk of any investment you make. But remember: If you don't take some risk, you may lose some ground to inflation and taxes.

4. How can I keep track of my investments?

All investments should be monitored periodically. How often depends on how risky they are and whether they are professionally managed. If you don't want to watch them closely, pick those you are willing to hold long-term (five years or more) or go with mutual funds, which are often ideal for the small investor because decisions to buy and sell are made by professionals. As a rule, consider switching investments if your objectives change, the economy changes, or the investment underperforms expectations. You can follow your investments by reading periodicals, such as newsletters, The Wall Street Journal, or the financial section of your daily newspaper, or by consulting with a professional adviser who can help you decide what to buy and when to sell.

5. How can I find a professional to help me choose and monitor my investments?

Start by finding out who advises the people you consider to be successful investors. An accountant or attorney may also have recommendations. Generally, there are three types of investment advisers: stockbrokers and some financial planners who recommend investments, buy and sell them for you, and receive commissions on their sales; investment advisers and some financial planners who recommend a total investment portfolio for you for a fee and who may or may not receive commissions or ongoing fees for handling your investments; and money managers who receive a percentage of your invested funds for managing them and transaction costs. Money managers usually work with people who have $100,000 or more to invest.

Be sure that the adviser you select has good credentials and a proven track record. He or she should be a registered investment adviser with both the Securities and Exchange Commission and the state where you reside and should supply you with an SEC form disclosing credentials and fees. Don't do business with anyone who calls on you without first checking on his or her background. If you would like to be referred to a local certified financial planner trained in investment advising, call the Institute of Certified Financial Planners at (800) 282PLAN.

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