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AN INVESTORS BEST FRIEND—ASSET ALLOCATION

23

Diversification: The Key to Investing

$83,285

$57,435

$34,899

$11,487

$10,000

$10,000

$2,000

Portfolio A

Portfolio B

Figure 2.1:

Portfolio A and Portfolio B each have $10,000 to invest.

Portfolio A is invested 100 percent in an investment earning 6 percent. Portfolio B is equally split between five higher-risk investments. Two of these investments earn 10 percent, one earns 6 percent, one earns 0

percent, and one loses 100 percent. After 30 years with this mix, Portfolio B has earned nearly $26,000 more than Portfolio A. Diver- sification does not guarantee a profit. These values are hypothetical and do not indicate any type of future results. The value and return on most investments will vary. (American Express Funds literature.)

assume that you’ll make a profit or insure against a loss, it may help temper any loss you may sustain.

INFLATION AND TAXES—HIDDEN DANGERS

The asset allocation approach also considers how other factors may affect your investment. Both inflation and taxes can wreak havoc on your investment accounts and may inhibit your ability to make more money. No proper financial plan should fail to take these things into consideration. For example, if you have a 10-percent return on your overall portfolio in a given year, your actual return may be 4 to 5 per- cent less because of federal, state, and local taxes.

Additionally, if you believe you will need $75,000 per year (in today’s dollars) to live on during your retirement, and you will be retir- ing in 10 years, you will need to factor in inflation. The purchasing

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