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Step 4 - Manage Your Investments

January 23rd, 2008 at 04:45 pm

Properly managing investments is an important step toward financial abundance. If you manage your own investments, implement an asset allocation that allows you to sleep well at night. While the stock market has consistently out-performed fixed income investments over every 20-year period since the great depression, a conservative allocation of equities to fixed income can often perform better than a more aggressive allocation.

In Financial Abundance Guide, Mary, Nancy and Joan find out that the returns from a portfolio with a 50% equity and 50% fixed income allocation performed better than a portfolio of 80% equities and 20% fixed income over the six year period between January 2, 2001 and December 31, 2006.

Unless you have the time and energy to do a significant amount of research on stocks, low cost, indexed mutual funds or ETFs will usually provide superior long- term results. Be sure that your equity allocation includes small, medium and large cap stocks. Over the past 25 years, mid cap stocks, an asset class that is often overlooked, have out performed both small caps and large cap stocks.

It is also wise to have international equities in your portfolio. While emerging markets have received a lot of press, developed countries equities will provide a safer long-term return. It is wise to also consider small amounts of “alternative investments” such as Real Estate Investment Trusts and gold. These investments can be purchased as Exchange Traded Funds or mutual funds with low fees.

If you have an investment adviser, be sure that their long term returns consistently out-perform the comparable indexes after all management fees are included. Be especially careful in dealing with advisers that are compensated by commissions on products that they sell. Compensation through commissions can sometimes produce conflicts between how an adviser is compensated and your best interests.

If your adviser suggests variable deferred annuities, be especially careful. If you decide that a deferred annuity is the correct product for you, consider buying the annuity through a non-commissioned company such as Schwab, Fidelity or Vanguard. You’ll usually find a better product with much lower costs.

Managing investments requires your active participation, even when the investments are managed by an investment adviser. By participating in all of your investment decisions, you are on the path to financial abundance.

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