# INVESTING

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```					                                 ALL ABOUT INVESTING
Riding out market volatility with dollar-cost averaging

D         ollar-cost averaging (DCA) is an investment strategy in which fixed dollar amounts are placed in
an investment or portfolio at regular intervals regardless of share prices. The DCA strategy
eliminates market timing, impulse buying and panic selling, mistakes that are made by less
experienced investors when they attempt to predict the exact bottom before they buy and then
predict the exact top before they sell. Unfortunately, investors who engage in speculation often get in just
before a downturn or sell before gains are realized. The logic behind DCA is that investors can purchase
more shares when market prices are low and limits their buying when prices are high. As prices rebound,
and the market starts to recover, a portfolio will have more shares available to appreciate.
Here is an example of how the DCA strategy works. An investor has \$25,000 and wants to purchase Acme
Company stocks currently valued at \$50. Instead of buying 500 shares at once, the investor divides the
\$25,000 into five equal amounts of \$5,000 and makes the maximum purchase for each interval, investing
\$5,000 in Acme every month for five consecutive months.
The table below shows the total stock purchases the investor would make if the price of Acme Company
stocks fluctuated every month.
Amount               Stock Price
Month                                                                      Shares Purchased
Invested
st
1                   \$5,000                  \$50             100 shares (\$5000 divided by \$50)
nd
2                    \$5,000                  \$40             125 shares (\$5000 divided by \$40)
rd
3                   \$5,000                  \$35             143 shares (\$5000 divided by \$35)
th
4                   \$5,000                  \$38             132 shares (\$5000 divided by \$38)
th
5                   \$5,000                    \$65             77 shares (\$5000 divided by \$65)
By the sixth month the total number of shares bought is 577. Assuming the price of the stock has reached
\$80, the portfolio would be worth \$46,160. If the investor had put all \$25,000 in Acme stocks at once, he
would have only 500 shares worth \$40,000.
However, DCA is a strategy and not a magic bullet. Experts say DCA typically works best when an
investment goes flat or down for years then suddenly breaks to the upside at the end of the investment
period. But if the stock market rises for a long period, DCA locks in investors with relatively little money
in the market. Also, the DCA strategy is only as effective as the portfolio or investment vehicle. On the
other hand, some financial specialists say the real value of DCA is that it enforces discipline on investors
who are driven by greed and gives peace of mind to those who are fearful of losing all their money when
the market tanks.

Does it make sense to convert a traditional IRA to a Roth IRA?

M           ost experts agree that, on the whole, people are better off with a Roth IRA because it can add
greater tax leverage to their retirement savings by maximizing their contributions. A Roth IRA’s
Converting a traditional IRA to a Roth IRA changes the tax treatment of the investment without
changing the nature of the investment itself. Because the Roth IRA is funded with after-tax dollars,
investment earnings are generally tax-free when you or your beneficiary withdraws funds from the account.
Unlike a traditional IRA, the Roth IRA does not impose an early distribution penalty on certain
withdrawals. If you withdraw from the converted amount before age 59½, you won’t have to pay taxes or
penalties – provided that five years have elapsed since the conversion. Additionally, a Roth IRA does not
require you to take minimum distributions after age 70½, so you can preserve its value and allow it to
compound for as long as you want.
Converting to a Roth IRA while the market is down provides a particular advantage: If your traditional
IRA regains and exceeds its current value when the market rebounds, all of that appreciation will be subject
to a higher ordinary income tax rate when you withdraw the money. In addition, converting to a Roth IRA
within the next year or two, while the market is down, may subject you to a lower conversion tax rate than
when the market rebounds. This is because your taxes on any deductible contributions and any investment
earnings will be reduced if your IRA portfolio has lost significant value over the past year.
For example, say the value of your IRA is \$25,000 less than it was in 2007. If you are in the 25 percent tax
bracket, the conversion tax will be about \$6,000 less. Furthermore, starting next year the government will
allow conversion taxes to be spread over two years (2011 and 2012).
However, despite the tax advantages provided by the Roth IRA, experts say the decision to convert
from a traditional IRA to a Roth IRA should be carefully evaluated. Roth IRA conversion may be a good
strategy if you meet any of the following conditions:
 You have sufficient time before retirement or are fairly recently retired, or longevity runs in
your family. In these situations, your account will have enough time to make up for the losses
due to the conversion tax.
 You expect to be in a higher tax bracket when you enter retirement.
 The income you declare from the conversion will not put you within a higher income tax
bracket that would disqualify you from certain tax breaks, such as credits and deductions, for
that year.
 You do not need to use the money soon, so your account will have enough time to make up
for the losses due to the conversion tax.
 You are already retired and taking Social Security, so converting to a Roth IRA could reduce
your Social Security income tax in subsequent years (because Roth distributions are excluded
from Social Security benefits for tax purposes).
 You have accumulated a large estate; so converting to a Roth IRA will reduce your estate tax
liability (whereas traditional IRA assets would be included in your taxable estate).

Exchange – Traded Funds: How do they work?

W
ith the financial markets slumping, many advisors say that consumers should stick with
investment products such as exchange-traded funds (ETFs_ to even out the risk while taking
ETGs are federally reulated investment vehicles similar to index mutual funds, but they are
traded just like stocks on major stock exchanges. Like index mutual funds, ETFs buy a basket of stocks or
bonds that mimic a particular market benchmark such as the Dow Jones Industrial Average, Standard &
Poor’s 500 Index, the Nasdaq Composite of the MSCI EAFE.
Like traditional stocks and bonds, ETFs can be traded throughout the day, allowing investors to bet on
shorter-term market movements. For example, if there is a steep rise in the S&P 500 throughout the day,
investors can take advantage of this by purchasing an ETF that mirrors that index. Investors can hold the
ETF for a few hours while the price continues to rise and then sell it at a profit before the close of business.
An ETF starts with large institutional investors who assemble the appropriate basket of stocks that
align with the shares in a particular index. These baskets are typically defined as 50,000-share blocks. The
stocks are sent to a specially designated custodial bank for safekeeping.
The custodial bank forwards the ETF shares to authorized participants (also known as market makers
or specialists). Authorized participants are free to sell ETF shares on the open market, where they are held,
traded or sold off in smaller lots through brokers.
ETFs have several attractive features. Neither the issuance or redemption of ETFs involves cash
(shares are borrowed and traded) and both incur minimal cost, which generates fewer capital gains, making
them more tax efficient. They are less volatile than individual stocks and cheaper than most mutual funds.
They have very low annual fees – as low as 0.09 percent of assets – because they simply track an index. In
comparison, the average mutual fund fee runs about 1.4 percent.
However, because ETFs are bought and sold through brokers, they involve transaction costs in the
form of commissions. Brokerage commissions can be anywhere from a few dollars per trade to \$20 per
ETFs offer easy diversification because there are funds for almost every type of investment. They
allow investors with limited expertise, low risk tolerance or liquidity issues to diversify into assets they
may not otherwise feel comfortable owning.
If you want additional information on Dollar Cost Averaging, Converting an IRA, or Exchange-Traded

The legal and tax information contained in these articles is merely a summary of our understanding and interpretation
of some current provisions of tax law and is not exhaustive. Consult your legal or tax advisor for advice concerning