THE PERFECT INVESTMENT
Henry Montag, CFP, CLTC | July 6th, 2009There’s no such thing as a perfect investment but if there were it would look a little like this.
It would be extremely safe and secure with very little chance of losing any of your principal. There would be Govt Guarantees to insure that your money would be returned. Remember in today’s investment environment the return OF your money is as important if not more than the return ON your money.
The next objective would of course be the growth or rate of return on your money after all no one wants an investment that would not provide a return that would not at least keep up with inflation. If you couldn’t achieve that you would be considered to be walking backwards in other words losing the value of your money due to cost of living increases that would cost more than the growth you’d be receiving on your money.
Since we always have to share our gain with the government by way of the taxes that we have to pay it would be ideal if our perfect Investment was to have some sort of Tax advantages. It could either offer tax deferred growth meaning that we wouldn’t have to pay taxes for a period of time usually the length of time that wed be holding the investment. Or it could provide a Tax Free return whereby we pay absolutely no taxes or a reduced amount of taxes on any growth we were fortunate enough to earn. Another advantage would be to either have the investment avoid or not be subject to any type of taxes, be they current ie Income Taxes or future ie Estate Taxes.
The last component of a perfect investment would entail how readily the investment can be turned into cash. Another terminology for this is known as liquidity. For instance a Money market or Savings Bank would rank highest on the listing of Liquidity. Whereas a mutual fund or stock could take a few days to sell the investment before you would receive your money . Still considered good liquidity. But if we were to look at a piece of real estate you would agree that it could take a considerable amount of time to sell your investment and actually get the cash into your pocket before you could actually use it for something else you wanted to purchase.
Now lets get back to the Idea of our perfect investment by looking at say Real estate as an example .
Its usually been a good safe investment until recently. It historically has provided an investor with a solid rate of return. It has various tax benefits and advantages. However it is always considered a illiquid investment simply because it can take a relatively long period of time before it might actually get sold. So it looks like we have 3 good points but one not so good point.
On the other hand that Money market or savings bank is extremely safe and secure and guaranteed .
The return has historically been 1/3 to 1/2 of what an investor in the stock market could earn but it is always considered a conservative return. From a liquidity point of view its excellent as all one has to do is walk into any bank and walk right out with the money you originally invested. But there arent any tax benefits , again 3 out of 4
Next lets look at an Insurance product called an annuity. It provides a return that is usually higher than a CD or Money market fund. Some even allow you to invest in a portion of the stock market so it can provide an even higher rate of return. Various annuities come with either an absolute built in principal guarantee while others allow you to build it right into the investment itself. There are even significant tax advantages that allow an investor to have their growth in the Annuity grow completely Tax deferred meaning you don’t have to pay taxes for as long as the investment is under the tax deferred umbrella offered by the Insurance company that offers the investment . But the potential weakness deals with the liquidity factor. Before the Insurance company as well a the Government allows you to take advantage of these excellent benefits they expect you to keep the money tied up within their investment for a period of years usually a minimum of 4 or sometimes a maximum on average of 7 years. So again we see that we only have 3 out of 4 of the positive components.
Regardless of which investment you chose youll find that theres always at least one thing in each and every investment that will prevent it from becoming that perfect investment because there is no such thing as a perfect investment and dont let anyone tell you any different . The point is that you must always chose to see which of the 4 factors are most important to you . Which ones fit your current needs at the time and which ones youre willing to trade off for or simply willing to do without.
As always Good luck
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Tags: cd, gain liquidity, henry montag, investing, investing with tax advantage, money market account, perfect investment, savings bank
About the Author: Henry Montag is an Independent Certified Financial Planner as well as a CLTC. He’s been in practice since 1976 with offices on Long Island, New York. He is a contributing writer for The Moneypaper, a national financial publication, been my sourced by Investors business Daily, Long Island Business News, Newsday, Wall St Journal, The Moneypaper,Investment News, Senior Lifestyles and has held insurance and securities licenses for over thirty years.
