The Right Moves

Build a strong Portfolio by minimizing taxes and controlling investment expenses There are a number of basic investing techniques you can use as you build your long-term portfolio. Following these guidelines doesn't guarantee the results you'll achieve. But understanding their advantages and their potential drawbacks may help you to make decisions.


	May	Jun	Jul	Aug
Amount invested	$100	$100	$100	$100
Average share price per month	$22	$17	$14	$18
Number of shares purchased	4.55	5.88	7.14	5.56

DOLLAR COST AVERAGING
The old adage that the smartest way to make money is to buy at the lowest price and sell at the highest is easier to say than it is to accomplish. If you could do that regularly, funding your retirement — or anything else — would be no problem.

A more reliable strategy is to make regular investments. For example, you might invest $100 every month, or $300 each quarter, in specific mutual funds. It's usually easier to stick to an investment plan if you spread your purchases over the year rather than trying to come up with a lump sum all at once. And, over time you can build a substantial investment.

Using this approach, called dollar cost averaging, you may also be able to lower the overall cost of your investment. Since fund prices fluctuate, sometimes you'll buy at a higher price, sometimes at a lower one. When the price is low, your $100 buys more shares. When it's high, it buys fewer shares. But you must buy regularly, including during periods when prices are low, to benefit from this approach. Otherwise, you're paying only the highest prices. Of course, dollar cost averaging does not guarantee a profit or protect against loss in declining markets.

AVERAGE SHARE PRICE

Average price per month Number of months	= Average share price
for example
($22+17+14+18) 4	= $17.75

AVERAGE SHARE COST

Total amount invested Total shares purchased	= Average share cost
for example
$400 4.55+5.88+7.14+5.56	= $17.29

To use dollar cost averaging for stock purchases, you can enroll in a company-sponsored dividend reinvestment plan (DRIP) that lets you make additional purchases or in a direct stock purchase plan. Many larger companies offer these alternatives. Or you can put a regular amount each month in a special investment account.

If you have no trouble sticking to a buying schedule, you can write the checks yourself. Or, if it's more convenient, you can arrange for automatic deductions from your checking or savings account. The advantage of the former is more flexibility, letting you change the amount or skip an occasional month.

Avoiding Capital Gains

AVOIDING THE TAX MAN
Of the two great myths about retirement — that your living expenses will drop dramatically and that you'll owe less income tax — the second is probably the bigger misconception. There's not much you can do to influence the tax rate. But some investing strategies may reduce the tax you owe, although you may find yourself subject to the alternative minimum tax (AMT).

If you're in one of the higher federal tax brackets and live in a high-tax state, one solution is to do some of your investing in tax-exempt municipal bonds. None of the interest is taxed (though capital gains, or any profit you make when you sell, may be). While tax-exempt investments usually pay less interest than taxable investments, you can use the following steps to figure out what you would need to earn on a taxable investment to equal the income on a tax-exempt one.

Subtract your current federal tax bracket from 100. For example if you're in the 35% bracket, you get 65.

100 - 35 = 65

Divide the yield on the tax-exempt investment by the number you get in step 1. The answer is the yield you need on a taxable investment to equal the tax-exempt yield.

Tax-exempt yield
	=	Equivalent taxable yield
100 - your tax rate

If you are in the 35% tax bracket, you'd need a taxable yield of 9.230% to earn as much as a tax-exempt investment paying 6%.

BUILDING A LADDER
If you're buying bonds or CDs, you can use a technique known as laddering. When you ladder, you choose similar investments with different maturity dates, and split your total investment more or less equally among them.

As each bond or CD comes due, you have the principal to reinvest in a new one to extend the ladder. For example, if interest rates have dropped, say from 7% to 5% on intermediate-term bonds, only that part of your total bond investment has to be reinvested at the lower rate. By the time the next bond matures, rates could be up again. Or you could make a different type of investment.

Laddering, in other words, is a way to keep your investments fluid and at the same time protect yourself against having to invest all your money at once if rates are low. Laddered investments can also be used as a regular source of income. As they come due, you can put the money into more liquid accounts to use for living expenses. By planning those cash infusions, you can avoid having to sell off other investments that would continue to produce income, such as stocks, longer-term bonds, or mutual funds.

HOW LADDERING WORKS
Purchase three Treasury notes with varying maturity dates to split up your principal. When each bond matures, reinvest the principal in another note.

If interest rates rise, you're able to take advantage of high-yielding investments

If interest rates drop, you'll have to reinvest only one-third of your total principal at lower rates

INVESTING STYLES
When you buy and hold, you keep a stock or bond for the long term, expecting it to increase in value and potentially provide income as well. If you trade, by turning over your portfolio regularly, you buy when you think a stock is going to increase in value, and sell when its return meets your expectations. If you trade, you may want to establish some specific guidelines, such as always selling when a stock increases 15% or 20% in value. You may also want to set a floor, and sell if the stock drops a specific percentage. That may help prevent major losses.

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