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opened up tax-advantaged 529 accounts for both of their young children. “Oppenheimer has a Scholar’s Edge plan we like,” says Karen. “Our children have so many years until college that we can invest aggressively, seeking high returns. Spreading the money around five different funds helps to reduce risk.”
STARTING FROM SCRATCH
Sometimes, though, risks are worth taking. Just ask Rosemary Speed, 46, a customer service representative at a federal agency in Buffalo, New York. “I had been playing the lottery for about eight years,” she recalls. “Then, in 2003, I won first prize — $1 million.”
Winning $1 million in New York’s lottery is not like receiving 10,000 $100 bills one day. “I was going to receive $50,000 per year,” says Speed. “After tax, that would have been around $33,000.” New York law permits lottery winners to sell their future income stream to a third party, which is what Speed did, pocketing $520,000 pre-tax.
“I used some of that money to buy a house,” says Speed. “The rest I’ve invested, mainly in mutual funds. My goal is to have enough money for a comfortable retirement, around age 60.”
Speed’s five mutual funds combine to form a well-balanced portfolio. “Diversification is always the No. 1 thing we look for when tailoring a selection of mutual funds for a client,” says Deborah Jordan, a financial planner with Ameriprise Financial in Williamsville, New York, who advises Speed. “We usually include international exposure because of the opportunity for enhanced returns and the diversification benefits of investing in foreign stocks.”
In particular, Jordan has suggested that Speed invest in Templeton Foreign fund, which holds large companies based in Japan, Hong Kong, and Europe. “This is a tried-and-true fund with a long, established track record,” she says. “The managers don’t do anything exotic, but they produce steady returns for investors.”
The other funds in Speed’s portfolio are also proven entities. She holds George Putnam Fund of Boston, a balanced fund that owns big-name stocks such as ExxonMobil and Citigroup along with high-quality bonds. “This fund has been a strong performer since 1937,” says Jordan, “so we’re confident it will continue to do well.”
Among Speed’s other holdings is Eaton-Vance Tax-Managed Dividend Income Fund. As the name suggests, this fund invests in stocks such as Marathon Oil and Bank of America that pay hefty dividends. At press time, its yield was nearly 5%, greater than the yield on Treasury bonds. What’s more, the fund is “tax-managed,” meaning that its managers employ tactics designed to reduce taxable distributions to shareholders.
“For additional tax-efficiency,” says Jordan, “we invest in Eaton Vance New York Municipals Fund.” As is the case with all municipal bond funds, it delivers income that’s exempt from federal income tax. This fund, moreover, holds only New York issues so the bond interest is exempt from state income tax as well.
The final ingredient in Speed’s blended portfolio is Evergreen Special Values. “This fund looks for small, undervalued companies,” says Jordan, “and it is another excellent long-term performer.” Through 2005, it had returned more than 15% a