How to choose the right investment strategy

May 1, 2017

"Determining what to invest in should be based primarily on the needs, temperament, and available resources of each individual or family," write Jeff Witz, CFP, and David Zemon.

I'm new to investing. What should I be looking for when selecting my investments?

Determining what to invest in should be based primarily on the needs, temperament, and available resources of each individual or family. The best investment for one person is often far less suited for someone else. Advice given in the media or from others unfamiliar with your particular situation often adds to the confusion. The process of choosing the most appropriate investment for your own specific situation can be made easier by carefully considering and answering the following questions:

What are your investment goals? One way to address this question is to ask yourself, “What do I want my money to do for me?” For example, the investor who is retired might have a need for additional income to meet current living expenses. Goals for working individuals or families may be longer term, such as saving for retirement, a child’s education, financing a major purchase, or creating and maintaining an emergency fund.

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, or principal. Investments designed to meet longer term goals such as retirement generally do not need to be as liquid as those earmarked as emergency funds.

More "Money Matters": How to prosper, survive during sky-high markets

What is your risk tolerance? Can you afford to risk losing a portion or all of your investment without it affecting how you live? In general, risk is related to return: the higher the risk, the higher the potential return; the lower the risk, the lower the potential return.

What is the impact of income taxes? Income taxes can have a significant, negative impact on your investment results. To reduce the impact of taxes, many high-income individuals invest in municipal bonds because the interest from those bonds is generally exempt from federal income tax, and in some instances the interest is also exempt from state income tax. Additionally, qualified retirement plans, life insurance policies, and annuity contracts are used to accumulate funds for retirement primarily because of their tax-advantaged nature.

What is the economic outlook? The state of the economy as a whole can cause investors to re-examine or change the mix of desired investments. For example, during periods of high inflation, tangible assets such as real estate and precious metals tend to produce nice results. During periods of stable or declining inflation, intangible assets such as stocks and bonds have generally done well. But keep in mind that, while this has been the case historically, there is no guarantee that history will repeat itself.

Next: Do I have the skill and knowledge needed to manage the investment?

 

Do I have the skill and knowledge needed to manage the investment? An investor may not have the specialized skills and knowledge needed to properly select or manage an investment. In such instances, professional investment advice, or investments where such advice is available, should be considered.

How much money is available to be invested? The investment tools available 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 in order to provide the needed diversification among many stocks. Many mutual funds and exchange-traded funds, however, provide diversification without the need for a large investment.

Read - Planning for retirement: How much is enough?

These questions are simply the starting point in developing an investment plan. By focusing on your own specific needs, goals, and objectives, you can establish and maintain an efficient investment plan, even in periods of economic uncertainty.

 

I have a health savings account (HSA). If I don’t use all the money in that account by the end of the year, I lose it, correct?

This is a common misconception. The HSA is often confused with a Flexible Spending Account (FSA). With an FSA, remaining funds at the end of the year are forfeited back to the plan. In some rare situations, you will be allowed to roll over a small amount, usually up to but no more than $500. An HSA, on the other hand, allows you to roll over your entire remaining balance year after year with no restrictions. In fact, many physicians try to build up the balance in their HSA and then use that account in retirement to pay Medicare premiums and other medical-related costs.

As a reminder, an individual can contribute up to $3,400 into their HSA in 2017 if they have single coverage on the health plan. For family coverage, the maximum contribution amount is $6,750.

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Send your questions about estate planning, retirement, and investing to Jeff Witz, CFP, c/o Urology Times, at UT@advanstar.com. Questions of general interest will be chosen for publication. The information in this column is designed to be authoritative. The publisher is not engaged in rendering legal, investment, or tax advice.

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