Last week, I discussed the increased withholding percentage threshold of a three percent contribution by both employer and employee that rolled into effect this year for those employees in the Bermuda National Pension Scheme.

For further clarification, this means everyone who started in fiscal year 2000 with the starting one-percent match structure. There are employees out there working for extremely generous firms. Some companies started their personnel off with a five percent match, while other firms have matched both sides to ten percent and more.

You, who work for these firms, consider yourselves very, very fortunate. This is found money. It is money you never would have had otherwise. How many of us have the discipline to save five percent of our take home pay, let alone 15 percent.

Calculate your take home pay of $3,000 per month times ten percent equals $300; it is as if someone handed you a gift on a plate, yours to invest as you please.

For those who have a mind to, put your thanks onto paper and send it to your human resource department and your Chief Executive Officer. Yes, you do work hard for this extra benefit; but guess what, your employer is not legally mandated to provide it.

He or she legally only has to pay three percent this year! In the United States and other civilised countries, contributing to employee pension plans has very definitive tax advantages; Bermudian employers realise only small savings on payroll tax.

The benefits of compounding and capital appreciation can never be promoted enough. Ten percent of your salary annual of $36,000 is $3600 invested at only four percent for 35 years is $274,119.

Change that rate of return to percent equals $514,319. These are not, by any stretch of the imagination, peanuts on that plate.

Having said that, everyone seems fairly comfortable with the investment diversification concept as demonstrated in typically brightly coloured pie charts, sort of reducing your funds to a Crayola colouring session.

And while it also seemed that employees understood and thought they picked out asset allocations appropriate for them, it has been very apparent during this bear market, that many employees really do not understand the reasons for diversification, nor did they fully understand their investment objectives and how emotionally they would react to market volatility.

Many more folks uncomfortable with the paper losses in their pension portfolio's chose to reallocate their funds, rather than waiting out the recovery in the markets. Within three months of September 11, market valuations were up; strong indicators point to a fairly good recovery in 2002.

Those who sold out cannot replace those losses easily, and rebalancing (reallocating) does means selling out. So to revisit what investing really means, basically, an individual may invest to achieve a rate of return higher than the rate of inflation.

It's not that simple, however, as we probably all realise after seeing and reading about Enron employees. They never even had the option to rebalance! As asset allocation strategy spreads diversification among different investment categories, such as equity, debt, cash international investments and real assets, such as real estate.

By allocating a fixed percentage of the total portfolio to each category and the maintaining those percentages with subsequent investments, the investor realises an averaging effect, a smoothing effect, so that no matter what the market activity, one or more of the asset classes under or over perform. Thus providing, in theory, a decent return, and perhaps not a spectacular return and in a bad market less of a loss.

Let's look at two pie charts, the investor wanted big returns (25 percent) and this was his/her choice remember, and represents his outside savings, not his pension allocation recommendations. We'll call it a moderate aggressive investment allocation. His age bracket, time horizon and other criteria indicate that he is ten years from retirement. These are also mutual funds and the year is 1999 The first chart is the original allocation.

ORIGINAL ASSET ALLOCATION for Joe Jones: Small cap mutual funds 30 percent; large cap mutual funds 20 percent; sector funds ten percent; international mutual funds20 percent; bonds and money funds 20 percent.

Beginning of year 2000 for Joe Jones; small cap mutual funds 50 percent large cap mutual funds15 percent; sector funds15 percent; international mutual funds 15 percent; bonds and money funds five percent.

How will these changes in valuation effect the overall returns of the portfolio? What happens as the valuations in stock drop and the yields on bonds rise? Next week, we figure out what he should do or should have done, and why asset allocation and diversification has to be weighed against your entire set of investments, not just your pension.

@EDITRULE:

Martha Harris Myron CPA CFP is a Certified Financial Planner (tm) (US licensed) practitioner. She holds a NASD Series 7 license, is an also a US tax practitioner, and is the winner 2001-The Bermudian Magazine - Best of Bermuda Gold Award for Investment Advice. Confidential E-mail can be directed to marthamyronnorthrock.bm.

This article expresses the opinion of the author alone. Under no circumstances is this advice to be taken as recommendations to buy or sell investment products or as a promotion for financial plans. The Editor of The Royal Gazette has final right of approval over headlines, content, and length/brevity of article.