By Joe Bofanti
Have you noticed how the word “perfect” has crept into our lexicon?
Someone asks you a question and when you reply, the reply back to you is “perfect.” And that seems a little much given that most replies are not perfectly exact. Answers may be great or wonderful or excellent, but perfect? Hardly ever.
A perfect game pitched in baseball — 27 up and 27 down — qualifies. A hole-in-one in golf — also perfect. A presentation to the board? Maybe it was really good. But no doubt there was some slight imperfection.
Which brings us to the perfect investment. Invariably not a week goes by that someone does not call me seeking the perfect investment. I think I am an outstanding financial professional, but I have yet to find any client or prospect the perfect investment. And for one simple reason: It does not exist.
Here is a list of what a perfect investment might look like:
No risk: No part of the investment could ever be lost due to market activity or any other reason.
High rate of return: The yield outperforms inflation and taxes while still giving you a solid return.
No income taxes: There will never be any income taxes due on the investment growth with the client keeping all that it earns.
Always available: There will be 100 percent liquidity with complete access to redeem all or part of the investment at any time without penalty.
Easy as pie: It will be an investment anyone could manage at any time without having any special financial knowledge or training.
The age-old advice for someone who comes across an investment with all these attributes: If it sounds too good to be true, it is.
However — and be glad there is a however when doing due diligence — asking certain questions will help you to focus in on the alternatives and aid in making the wisest investment choice given specific financial needs. For example:
What is the purpose of the investment? This is the most important question to ask and the answer should be as specific as possible.
What is your risk tolerance? Will you be able sleep whenever the markets suffer a hiccup, or do you have the ability to ride out short-term ups and downs in exchange for potential long-term growth?
When will you need the income you expect the investment to generate? Simple, right? A short-term investment to meet long-term goals, and vice versa, is a recipe for disaster.
What amount do you have to invest? Your financial professional can recommend various options based on the sum you have to invest.
Are income taxes a concern? Different investments offer different tax treatments. Your tax bracket plays a part in this question as well.
In what state is the economy? This is last on the list because the economy’s current (and future) condition is out of your control. But it must be taken into account and is another topic to be considered when meeting with your financial adviser.
So there you have it — attributes to seek and questions to ask. Unfortunately, you won’t find the perfect investment.
But asking the right questions about your financial needs, and building a financial foundation that includes the proper mix of investments and insurance — including life, health, disability income and long-term care — will help you meet many of life’s financial needs.
Even without the perfect investment.
Joe Bonfanti, CFA, works for the 1847 Private Client Group.