Managing Risk

My last post introduced some of the different types of risk you face while investing. A question to ask is, "Why take the risk?" The answer is Reward. In general, the more risk you're willing to take on, the higher your potential returns (but also the bigger your potential losses). For example, a savings account at an FDIC insured bank has low risk, but also low rewards (in the form of low interest rates).

In investing, the goal is to maximize your returns without taking on more risk than you can bear. The best way to reduce risk is to follow the old adage, "Don't put all your eggs in one basket!" The key to reducing risk in investing is diversification.

You can diversify mainly in two ways:

• Diversify Investment Types: Spread your investments out among different asset classes, such as stocks, bonds, real estate, commodities, etc.
• Diversify Within Asset Classes: Diversify stocks by holding different sectors, such as technologies, consumer goods, transportation, etc. Diversify bonds by holding corporate bonds, US government bonds, municipal bonds, high yield bonds, junk bonds. Diversify in real estate by holding residential, commercial or industrial investments, etc.

The best way to come up with a plan to have a diverse portfolio that meets your risk tolerance is to work with an investing professional.

What is Risk?

The Random House dictionary defines risk as "exposure to the chance of injury or loss."

When considering investments, risk is the chance that your investment will provide lower returns than expected. Here are some of the different types of risk to consider when choosing investments:

• Market Risk: when an investment loses because of overall declines in the market - for example, your house may be well kept and even improved, but its market value may have declined during the recent recession
• Inflation Risk: when prices in the economy rise as a whole, decreasing the worth of investment income
• Default Risk: when an entity issuing a debt investment (i.e. a bond) is unable to pay as promised
• Liquidity Risk: what value could you lose during the time you try to sell an investment? Common stock of a Fortune 500 company has low liquidity risk, since a sale order could typically be executed instantaneously. A 17th century vase may take longer to sell, and if you need the proceeds immediately, you might need to settle for a lower offer.
• Political Risk: when changes in governments or politics adversely affect markets or investments you hold
• Exchange Risk: when you hold foreign investments, changes in foreign currency valuations can adversely affect your investments.

One of the keys to successful investing is to understand the various risks you face, and to take steps or choose investments that help mitigate those risks.

Tax Credits for Making Your Home Energy Efficient

Courtesy of 360 Degrees of Financial Literacy from the American Institute of Certified Public Accountants.

The American Recovery and Reinvestment Act of 2009, better known as the Stimulus Bill, has provisions that provide tax credits for making your homes more energy efficient.

For 2009 and 2010, you can receive a tax credit of 30% of the cost of the following items in your principal residence:

• New windows
• New doors
• Insulation
• Roofing
• HVAC
• Non-solar water heaters
• Biomass stoves

There are also provisions for tax credits on installation of larger items, such as geothermal heat pumps, solar panels, etc. For a more detailed explanation and to see the full article from 360 Degrees of Financial Literacy, click here.

Credit Card Reform

Compliments of smartmoney.com.

Last month, the Credit Card Accountability, Responsibility and Disclosure (CARD) ACT was signed into law. According to administration officials, CARD will "give consumers greater protections and a fairer deal when they choose to use credit cards."

The CARD Act:

• Restricts retroactive rate increases
• Provides more advance notice of rate hikes
• Increases time to pay bills
• Applies payments to highest rate balances first
• Eliminates universal default
• Requires an opt-in for over-limit fees
• Restricts college credit

For more details on each of these provisions and to see the full article on smartmoney.com, click here.

Five Everyday Items You Don't Need

Courtesy of Yahoo! Personal Finance and TheStreet.com, here are five things you can cut back on or possibly eliminate from your daily life to save money.

• Bottled beverages
• Food
• Diet products
• Vitamins
• Cosmetics and toiletries

Here's a link to the article for their reasons and explanations.

Payroll Income Tax Withholdings

This topic courtesy of a question asked by an ALS member library...

As employers, there are many different federal, state, and sometimes local laws, rules, and procedures that we must follow when we hire and pay employees.

One of the requirements, withholding of federal income taxes, was recently changed under the American Recovery and Reinvestment Act of 2009, commonly known as the Economic Stimulus Bill. The change, known as the "Making Work Pay" provision, adjusted withholding tables so that the effect was that workers would have an average of $10 per week less of federal income tax withholding which, in theory, would lead to higher take home pay and hopefully more spending - thus stimulating the economy.

For my earlier post on the Economic Stimulus Bill, click here.

If you use a third-party service to process your payroll, they should already have made the changes for the "Making Work Pay" provision effective with payrolls in May 2009.

If you use software to process your payroll, you want to make sure your software vendor has provided you with the most up-to-date tables to ensure the "Making Work Pay" provision goes into effect.

If you calculate payroll manually, you can find the updated instructions and withholding tables in Publication 15-T at the IRS website.

Remember, if you have a specific topic you want addressed - just send me a note!