Key Investment Questions

By Gary Woolman

Asking the right question can help you make the right decision.

The "right" investment for one person is often not right for someone else.

Many individuals and families have both a need and a desire to accumulate wealth. The inevitable question is, "What do I invest the money in?"

The answer to the question usually depends on the available resources, temperament, and needs and wants of each individual, family or business. The right investment for one person is often not right for someone else. The process for choosing the most appropriate investment can be made easier by carefully considering, and answering, the following questions:

What do I want the money to do for me and/or family, and/or business?
For example, an investor might need to have additional income, to meet current living expenses. Other common needs or wants include saving for long term objectives such as retirement, a child's education or a dream vacation, giving to a charitable cause, or for a quickly available source for emergency funds.
How liquid does the investment need to be?
The term "liquidity" refers to how quickly an investment can be turned into cash, without losing any of the invested dollars. One needs to be careful with the tool that surrounds the investment, i.e. many retirement funds (401(k)'s, IRA's, 403 (b)'s, 457 plans, ect.) limit or prohibit access to dollars that are accumulating in the investment. These monies will not be easily accessible should a person find themselves experiencing financial hardship if one is accumulating excessive debt, or a child is heading for college, or if they lose their job, or have extensive medical needs, and they have limited access to these funds.
Can you afford to risk losing a portion, or even all, of your investment without it affecting how you live?
In general, risk comes in different flavors. It could be market risk-the loss of principal; inflation risk-the loss of purchasing power; interest rate risk-does the investment value fluctuate with changes in interest rates?
What is the impact of income taxes?
Income taxes can have a significant, negative impact on your investment results. For example, many high-income individuals invest in municipal bonds because the interest from such bonds is generally exempt from Federal income tax; in some instances the interest is also exempt from state income tax. IRA's, 401(k)'s, other qualified retirement plans and annuities defer the tax but don't eliminate the future tax upon distribution of the account. If set up correctly, Roth IRA's and certain permanent life insurance policies may provide tax-free accumulation and generally, no taxes are due when the account is accessed in the future.

**The principal value of bonds will fluctuate with market conditions. Bonds redeemed prior to maturity may be worth more or less than their original cost. Bond interest paid by a municipality outside the state in which you reside could be subject to state and local income taxes. If you sell a municipal bond at a profit you could incur capital gains taxes. In some cases, municipal bond interest could be subject to the federal alternative minimum tax.
What is the economic and demographic outlook?
The state of the economy as a whole can change the mix of desirable investments. For example, during periods of high inflation, tangible assets such as real estate, precious metals, and collectibles such as coins and art, have tended to produce good results. During periods of stable and declining inflation, intangible assets such as stocks and bonds have generally done well. On the demographic side, watch what the "Baby-Boomers," those born between 1946 and 1964, do with their money. This is the largest segment of the economy. We will see the 1946 boomers turning 65 in 2011 and the question looms, what will they need? And where will they be spending and investing dollars?
Are the skills, knowledge, time and interest to manage the investment available?
An investor may not have the specialized skills, knowledge, time or interest to properly select or manage an investment. In such cases, professional investment advice should be considered.
How much money is available to be invested?
The investment tools open to an investor can vary, depending on the amount of money available. For example, direct investment in the stock market can require a relatively large investment. Many mutual funds, however, will accept smaller contributions, as low as $25 to $50, on a monthly basis.

At Woolman Financial Group we help clients work on the proper investment strategy given the above questions are taken into account. Please feel free to contact any of our offices for further advice on this topic or other issues pertaining to your finances.

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**Financial Advisors do not provide specific tax or legal advice. You should consult your specific tax or legal professional regarding your specific situation.

**Investments will fluctuate and may be worth more or less than originally invested.