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Tuesday, Sep 26, 2023

Invest Aggressively Only if Time Is on Your Side

Dear George: I hear people say that investors with a long-term perspective should be aggressive. However, I’m not sure what that means. What are aggressive investments?

, Erin, San Diego

Dear Erin: On the scales of risk/reward investments, aggressive investments rank the highest. Simply put, an investor who is willing to accept high risk in exchange for the potential for high reward should consider a portfolio of aggressive stocks.

The best way to get a sense of what is a high risk/reward stock is to review the portfolios of mutual funds that consider themselves to be aggressive.

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Let’s take a look at the Fidelity Aggressive Growth Fund. Like most stock mutual funds this Fidelity portfolio lists its objective as “capital appreciation.” The strategy of this aggressive portfolio is to invest “primarily in common stocks of domestic and foreign issuers that (Fidelity) believes offer the potential for accelerated earning or revenue growth.”

The key word in that description is “accelerated.” That means the manager will be inclined to invest in medium-sized companies that may be more volatile than larger companies.

One of the easiest ways to determine the risk/reward nature of a fund is to look at the stocks in the portfolio. Odds are an aggressive fund will own a lot of stocks you may have never heard of. Again, the top holdings in the Fidelity Aggressive Growth Fund are Exodus Communications, Brocade Communications Systems, Realnetworks, Foundry Networks and Verio. These are hardly household names.

However, the portfolio also contains some recent gainers such as Qualcomm, Intuit, Tyco International and MCI Worldcom.

Aggressive funds are often heavily weighted toward technology stocks and, therefore, their returns in recent years have been spectacular, often in excess of 100 percent over the past 12 months. It is very unlikely these funds can keep up this kind of performance.

I would suggest any investor with a time horizon of less than five years steer clear of aggressive stocks and mutual funds. But, if you have time on your side, the rewards should outweigh the risks.

Dear George: I am changing jobs and want to transfer my 401(k) funds to an IRA. Can I move the money directly to a Roth IRA?

, Jim, Carlsbad

Dear Jim: Getting your money from a 401(k) to a Roth IRA can be accomplished but there are several steps to the process.

As you know, a 401(k) is a tax-deferred account. That means that none of the money in the account has been taxed. Uncle Sam will be watching very carefully to see where the money goes when it leaves the plan’s custodian.

To make the process move smoothly, you have to roll the funds into a tax-deferred IRA. That keeps the taxman away.

Once the money has been moved into the traditional IRA you can make the decision about the next step, switching to a Roth. That step is the one that will trigger a tax liability.

All the assets that have gone untaxed will now be assessed. Let’s say you have $10,000 in the deferred account and you move it to a Roth IRA. You can assume a tax liability of around $3,000 (combined state and federal income taxes).

If you make the change it is wise to pay those taxes with money that is not taken out of the account. If you transfer less than the full amount you could be subject to certain penalties as well as the taxes.

Chamberlin is the host of “Money in the Morning,” heard weekdays from 9 a.m. to noon on Ksdo.com A/M 1130. Send your letters to him to P.O. Box 1969, Carlsbad, CA 92018, or E-mail him at (george@,moneyinthemorning.com).


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