UNRAVELING THE INVESTMENT RIDDLE



UNRAVELING THE INVESTMENT RIDDLE

Michael Tove, CEP, RFC

When it comes to investing, everyone wants the same three things: high growth, unrestricted liquidity and absolute safety. Obviously, such a thing does not exist and even though most people would say they agree, they continue to invest as though it did.

Within all the world of financial planning, there are only two categories of investments:

1. Those that can lose value - called securities investments. They include stocks, bonds, mutual funds (including indexed funds), variable annuities, precious metals, real estate and collectables

2. Those that cannot lose value - called fixed return accounts. They include bank deposits (CD’s, etc.), money market accounts and fixed annuities.

Most investors who seek return put everything into securities (risk investments) and “hope” for good times. Investors who have been burned with that strategy head for the banks and put everything in CD’s where “at least the money is safe.” Neither strategy is balanced or wise.

While there is no such thing as an investment that offers high growth with absolute safety and unrestricted liquidity, it is possible to pair two of these. Sound investing requires accepting trade-offs within these three ideal desires and then selecting investments with different balances for different financial goals. For example, an investor who seeks high return should look to achieve that goal through a balance of risk investments with full liquidity and non-risk investments with restricted liquidity.

No single product or strategy is always right for everyone – and none is always wrong. The mix that someone should have depends on specific circumstances, time horizons and personal goals. It is also important to recognize that as we go through life, these variables change and so should the financial portfolio composition. Everyone’s circumstances are unique. However, there are certain “rules” that serve as sound guidelines for balanced financial planning:

1. Maintain enough “cash” to cover yourself for 3-6 months of living expenses. Cash in this case refers to any account that can offer absolute safety with complete liquidity by limiting growth potential. Examples would include money market and savings accounts.

2. Avoid risk-investments with money you cannot afford to lose unless the investing time horizon is long (e.g., more than 10 years). Do not invest money you will need for income within the next 10 years. Instead, use secure products such as fixed index annuities that can offer solid growth potential with complete safety in exchange for some restrictions on total liquidity.

3. Market investments are suitable when time horizons and risk tolerance the acceptance of risk to maintain growth potential and liquidity is suitable. But seek to minimize the overall risk by long term investing and correctly diversifying the portfolio. For example, consider a handful of mutual funds that respond differently from each other in different market situations.

4. Limit aggressive and short-term risk investments to money you can “afford” to lose. If losing it would hurt, don’t risk it.

5. The older you are, the less you should have at risk in the market.

6. Resist greed. It’s not necessary to have high growth with everything you own.

Finally, rely only on the advice of licensed professionals who have first-hand working knowledge of your specific circumstances. Ignore the unsolicited opinions from TV, radio or newspaper commentators. Many of them have a hidden agenda and use their media pulpit to bash a line of products they don’t or can’t sell. Worse, none of them has insight into your personal needs and carry no liability for their bad advice if it causes you harm. NOTE: There is no such thing as an entire category of financial products that is universally good or bad for all. Anyone who implies otherwise is either lying or a fool.

................
................

In order to avoid copyright disputes, this page is only a partial summary.

Google Online Preview   Download