Invest For Growth

by Alan Lavine and Gail Liberman

Are you receiving periodic interest and dividend payments from your investments?

Big mistake, says Ron Muhlenkamp, author of Harvesting Profits on Wall Street (Muhlenkamp & Company Inc.). Reason: Inflation and income taxes can take too much of a bite.

Here’s the average annual return between year-end 1925 and 2004, after taxes and inflation. Data, from Ibbotson Associates, Chicago, assume no capital gains taxes for municipal bonds and reinvestment of income.

• Stocks: 4.8 percent.
• Bonds: .6 percent.
• U.S. Treasury bills: -.9 percent.

Better strategy: Invest in growth-oriented stocks or stock mutual funds, Muhlenkamp says. If you need money to live on, take regular withdrawals as needed.

This way, you’ll only get hit with a maximum 15 percent capital gains tax. Continue investing on an after-tax basis to grow more assets.

Periodically review and adjust your investments to reflect changes in the markets, tax laws and personal goals. Move extra assets to heirs or charities.  

Alan Lavine and Gail Liberman are husband-wife personal finance columnists, journalists and authors. They are the authors of "Rags To Retirement," published by Alpha Books. Their columns appear in newspapers throughout New England and the Southeast, as well as online. Their commentary on mutual funds and personal finance is carried by 200 radio stations nationwide every Sunday over Business News Network's Charles DeRose Financial Advisor Show. Al and Gail’s new book is "Rags To Retirement:  Stories from people who retired well on much less than you think," published by Alpha Books.

More articles by Al and Gail can be found here.