Investments keyed to personal situation

Suggesting an investment for a client or reader usually requires considerable information about his or her unique situation. No ideal investment exists for all people for all time. When a reader asks, "How can I invest $1,000?" no meaningful answer is possible. Anyone expecting to invest a significant sum should look at these broad considerations:

* Age. Retirees or persons about to retire can't afford to risk their capital. If they should lose their capital in a risky venture while attempting to gain more income, they cannot replace the funds by working. Safety of principal is more important than yield. Thus, I frequently suggest that persons in retirement accept a smaller return rather than speculate with their capital. But, just as important, they should keep all assets working. Instead of leaving a substantial cash value tied up in an insurance policy, retirees should examine various alternatives to put that capital to work producing immediate income.

Important in a different context are investment objectives for younger persons. Accumulating and keeping assets in risk-free but low-paying investment returning less than inflation after taxes means their capital is losing value. Younger investors can afford to take more risks to avoid the guaranteed losses of insured savings of other low-risk alternatives. Higher risks could involve future losses, but unless one accepts some risk, there is no possibility of matching or overcoming inflation. One can expect some losses in any high-risk program, but gains from winners should compensate for minor losses. Long-term growth with little or no current income may prove best overall, as net asset growth can usually be taken out as a capital gain with less income-tax impact than annual dividends. Or, real estates appreciation could compensate an investor for the risks and illiquidity involved.

* Asset base. How much one has to invest affects any decision. A large asset base affords opportunity for wide diversification. Any individual investment should be considered in relation to the makeup of the portfolio. diversification involves more than simply spreading money around among different stocks and/or bonds. Diversification of risks and possibly a hedge against inflation may figure in a large portfolio. Without complete knowledge of other investments, a specific decision could be wrong for that person. Small portfolios with limited asset bases also need diversification, but the cost of acquiring and trading several small holdings can penalize yield and fail to meet one's investment objectives.

* Personal philosophy. Some persons cannot live with risk. They sleep poorly if money is invested in stocks that move up and down with some volatility. Nearly everyone has his or her own "comfort zone." Different people can live with different levels of risk. Speculators on the commodities market may sleep as well as someone with their cash in Treasury bills because their "comfort zones" are different. If an investment's risk keeps you awake worrying , then skip the extra yield and sleep soundly.

* Taxes. A person with a 50-percent marginal tax rate can afford to invest in risky ventures for a higher yield for two reasons: Losses are absorbed 50-50 with the government, and higher yields are necessary to gain a higher level of spendable income.

An adviser needs to know these facts. They are factors you should consider when deciding among numerous possibilities. Look at alternatives and rate each of them on the five scales before deciding. If an investment is unsuitable for you, avoid it.

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