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Financial Planning

Your Investing Problems Solved

Here's how to reduce risk, find extra money to set aside and more.

Below we tackle some of our readers' biggest concerns about investing. Their questions might be yours, too.

How can I reduce my investment risk?

I don't have extra money to invest.

Should I buy or cash in savings bonds?

How Can I Reduce My Investment Risk?

The best way to protect your stock investments is to own a broad mix of large and small companies and foreign and domestic issues. "Diversifying globally has the potential to both increase returns and lower risk," says Mark Gleason, a financial adviser in Burbank, Cal. Use the Instant X-Ray tool at Morningstar.com to take a big picture of your entire portfolio, including brokerage accounts, employer-sponsored retirement plans and IRAs.

Then, when the market stumbles as it did last summer, think minor adjustment, not total makeover. You can rebalance your accounts by boosting your mix of less-volatile investments. For instance, add more money to high-quality bonds, Treasury bills and CDs. Increase your exposure to low-risk mutual funds or to companies that promise steady growth, such as health-care firms and producers of brand-name consumer staples (see Shelter in a Stormy Market).

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Use a light touch. Instead of selling funds or stocks, you could discontinue contributions to investments whose allocations have grown too large and raise your stake in smaller categories. That would minimize tax consequences. Shifting assets inside a retirement account has no tax consequences.

Be disciplined. You might rebalance once a year or move money when your investments have strayed more than five percentage points or so from their original allocations. Sticking to a plan forces you to sell high and buy low, which reduces risk and protects you against erratic market moves. -- Thomas M. Anderson

I Don't Have Extra Money to Invest

Sure, you do. It doesn't take much to seed a nest egg. Josh Goldbeck is a 24-year-old loan processor at US Bank who will earn $24,000 this year. But Goldbeck, who lives in Oshkosh, Wis., manages to contribute 2% of his pay to his 401(k) plan and expects to bump that up to 4% when he qualifies for the company match next year. In addition, he has more than $7,000 socked away in a Roth IRA. "I've always been a saver," says Goldbeck, who is pursuing his MBA at the University of Wisconsin at Oshkosh. Below are three ways to come up with the cash:

Get your employer to help. Like Goldbeck, you won't miss money that comes off the top of your salary, and a company retirement match is free money. Or arrange to have part of your paycheck deposited into a savings or investment account. Most mutual funds require an initial investment of $1,000 or more, but you can transfer the money from savings when you have enough.

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Invest automatically. A number of mutual fund companies let you get around high minimums if you agree to make regular monthly investments. T. Rowe Price, for example, lets you start with only $50 a month per fund, instead of the typical $2,500 minimum, if you agree to transfer that amount automatically from your bank account. Pick a target-date retirement fund, which gradually shifts its allocation from stocks to bonds as time goes on.

Find extra cash. Put investable cash in your pocket by filing a new W-4 form with your employer to adjust the number of withholding allowances you're claiming (use our withholding calculator). Each allowance to which you're entitled basically makes $3,400 of your annual income off-limits for withholding and increases your take-home pay. Another source of ready cash: Raise the deductibles on your homeowners and car insurance, which can cut your premiums by hundreds of dollars a year.-- Thomas Anderson

Should I Buy or Cash in Savings Bonds?

If you're thinking of buying a new savings bond, you would be better off putting your money in an online bank. "Online banks typically pay an interest rate that's 1.25 percentage points higher than savings bonds," says Christopher Cordaro, chief investment officer with RegentAtlantic Capital in Chatham, N.J. "And they have no minimums or redemption penalties."

The decision gets trickier, however, if you already own savings bonds. In that case, look up the bond's current yield at www.treasurydirect.gov. If you've held the bond for at least five years, you can simply compare yields. For instance, series HH bonds that are more than ten years old are earning just 1.5%, which is easy to beat in an online bank.

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But if you cash in a savings bond before five years, you'll have to pay a penalty of three months' interest (and you can't redeem a bond at all within one year). "If your bonds are earning 4% or better, it's going to be very difficult to offset that penalty with another investment," says Greg McBride, of Bankrate.com. It could be worthwhile to hang on to EE bonds issued between May 1997 and April 2005, which are currently paying 4.15%. McBride also recommends keeping inflation-indexed I bonds that were issued before November 2001.

On the other hand, if your bond is earning less than 4%, "consider swapping out and locking in a higher-yield CD," says McBride. Remember that you'll owe taxes on the interest when you redeem EE or I bonds. -- Kimberly Lankford