Regardless, we must always understand – when will you potentially need the money? If we do not have a timeframe, we cannot address the elephant in the room – risk.
Safety money (cash) will yield a lower return. In exchange, the funds are readily available and will not go up and down with the markets. Tax-deferred money invested in the stock market is designed for longer term growth. Problems arise when that longer term money is needed prior to the plan and might result in selling the positions at a loss or taking on much dreaded tax penalties. Taxes are a killer and good planning can help avoid undue bills.
The second building block, Objective, determines what type of investments will be suitable. If the objective is to maintain the principal at all costs, then shorter term, liquid investments will work. If the objective is to aggressively build a growth portfolio, then a global stock mix may be in the cards. This ties in with the first building block of timeframe. The objective takes the discussion to a deeper place. For instance, if some of the funds were inherited, the thought of a principal decline may be unattractive. This will change the conversation and strategy.
Next up is the Tax Structure. Some geniuses in the financial world call this asset location. If we are investing for long term growth, creating realized capital gains, and kicking off a lot of dividends, the best location for those assets is in Roth IRA accounts. All the aforementioned traits will not result in any taxes being paid. The converse is then true. If we are living off the income of our portfolio and spending our dividends then placing assets in an account that supports that structure is important.
Risk Diggity – My newest moniker is “Diggity”. I add it to several things including my Grand-puppy, Prince Diggity. Anyway, risk is personal. Like inflation, your situation and your mindset determine what types of risks you can afford. While, as an advisor, I have my ideas about what types of risk I feel you can take – it only matters what types of risk YOU are willing to take. If the stock market churns your stomach and keeps you up at night, placing stock market assets in a Roth, etc. will not do any good. Customized risk is integral to a solvent investment plan and a key component of the work we do for our clients – which is understanding their views on risk.
Putting an investment plan in place requires some insight and forethought. Many pundits prescribe cookie cutter plans designed to plug the masses into their products. Beware of the “perfect investment” – I’ve been looking for it my entire career and still a searching! 😊
Our next missive will take on “tuning out the noise.”
