On money

Personal Finance editor HELEN HUNTLEY E-mail: Click here Archive

By HELEN HUNTLEY

© St. Petersburg Times,
published July 8, 2001

Investors, let a set of principles be your guide

Q. Why you don't you tell people investing in the stock market the three principles I followed religiously when investing during the 1950s and '60s: 1. Never fall in love with a stock. 2. You will never go broke taking a profit, so don't be greedy. 3. Don't hold stocks that pay little or no dividends. Do you agree?

A. You have the right idea: Investors should develop a set of principles to guide them as they invest. That is a lot better than making decisions based on hot tips or whims.

"Never fall in love with a stock" is another way of saying, "Don't let your emotions rule your investments," which is good advice for anyone. Decisions to buy and sell should be based on the facts and your best judgment about a company's future prospects.

Your other principles will not be right for everyone, or at least not without a little adjustment.

You may not go broke taking profits, but you could reduce your investment return, particularly if you trade frequently. There is even a contradictory adage: "Sell your losers and let your winners ride." Nevertheless, I agree that if a stock has had huge gains, it is prudent to take some money off the table. Thousands of Nasdaq investors are kicking themselves because they did not do this. And if you really think a stock has topped out, you should sell and invest in something you think has better prospects.

A conservative retiree might be well served by your advice to invest only in dividend-paying stocks since dividends provide a cushion in a falling stock market. But I think it would be too extreme for most investors to automatically exclude stocks from their portfolios based solely on a lack of dividends. Many growth companies choose to invest in their businesses rather than paying dividends.

Q. I am confused about the new law reducing the amount of Social Security income the federal government can tax. I am married, but my husband and I file separately. At what level of income are we required to pay income tax on our Social Security benefits?

A. The tax break you probably are recalling was approved by the House of Representatives but never made it into law, said Gregory Rosica, tax partner at Arthur Andersen in Tampa. This is one of several areas of the tax code that punishes married people who file separately.

If you and your husband lived together at any time during the year and you file separately, you will pay taxes on part of your Social Security benefits if you have even $1 of income. Consider figuring your taxes both jointly and separately, then opting for the method that gives you the smaller tax bill.

Q. I have two mutual funds that are called "directed beneficiary" for which I have designated beneficiaries. I also have retirement accounts with named beneficiaries. My will names beneficiaries to receive my estate in general. Is there a potential conflict here? Do the beneficiaries on the mutual funds have to match those in the will? If not, which takes priority?

A. When you name a beneficiary on an account or retirement plan, you bypass your will. The money will go directly to the named beneficiary. The names need not be the same as those in your will.

One risk of varying beneficiaries is that one or more might be left out if you close an account or it declines in value by the time of your death.

Reader response

You recently suggested people hedge their bets on certificates of deposit by buying CDs with staggered maturities. Here is another idea: If you have $5,000 to invest in a CD, instead of buying one CD for $5,000, buy five CDs for $1,000 each. Then if you need access to money, you can just cash in one or two CDs and be penalized on that amount. If you had one $5,000 CD and had to cash it in early, you would be penalized for the entire $5,000 amount.

Online money map

Berkshire Hathaway's legendary chairman Warren Buffett is widely known for annual letters to shareholders in which he shares pithy quotes and his investment philosophy. The company Web site (http://www.berkshirehathaway.com) includes Buffett's shareholder letters dating back to 1977.

Helen Huntley writes about investing and markets for the Times. If you have a question about investments or personal finance, send it to On Money. We'll try to answer those we think are of greatest reader interest. All questions must be submitted in writing, but readers' names will not be published. Send questions to Helen Huntley, Times, P.O. Box 1121, St. Petersburg, FL 33731, or to huntley@sptimes.com by e-mail.

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