May 2003 "How Safe Is Your Investment?"

PLANNING FOR WEALTH AND SECURITY
By Attorneys Jennifer & Jeff Hawkins

HOW SAFE IS YOUR INVESTMENT?

You’ve worked hard all your life, lived within your means, and saved as much as you could set aside for your retirement. Your children are grown and you qualify for senior citizen’s discounts at many restaurants. A burning question for you and many retirees is how to invest your money safely.

WHAT IS SAFE?

Business schools teach finance students that every use of money is risky. If you save money in a bank account, you risk missing out on higher income from other investments when interest rates drop as low as they have in recent years. If you ride the stock market roller coaster, you may hit bottom like many stock market victims of the post-dotcom craze. Ultimately, no investment is “safe” from all risks and a balanced investment strategy remains the correct standard for smart investment.

CONTROL THE THREE MAIN RISKS

Three major sources of risk exist in all investments: capital risk, rate of return risk, and liquidity risk. You can reduce capital risk; the risk of losing the original amount of your investment, by investing in FDIC insured bank accounts, U.S. government bonds or other traditionally secure investments. Long-term, diversified investment planning is the best cure for return on investment risk; the risk that your investment with not earn enough income or wealth. You can limit liquidity risk; the risk that you may not be able to get your money when you need it; by keeping adequate funds in cash, checking accounts, passbook savings accounts, and money market accounts.

THE INVESTMENT PYRAMID

Many people have seen the Food and Drug Administration’s food pyramid in elementary school. You know – the chart that shows the relative amount of fruits, vegetables, breads, meats, and dairy products that everyone should eat. The investment community also has a pyramid that promotes smart investment strategy.

Imagine a pyramid divided into top, middle and bottom layers. Generally speaking, the largest portion of investment should be placed in insured savings accounts, government savings bonds, certificates of deposit, money market funds, government securities, or life insurance policies issued by stable insurance companies with sound investment components in the bottom of the pyramid. The middle level of the pyramid would contain medium risk with investments in excellent quality stocks and bonds issued by solid companies, and highly rated mutual funds. Higher levels of the pyramid should contain the smallest portions of investment, including real estate (other than your home), lesser quality stocks, unrated bonds, and aggressive mutual funds, collectibles and other extremely volatile investments.

An investor should speak with an investment advisor about minimizing these risks with investments that are appropriate for the person’s age, income needs, and possible future expenses. For example, a 92 year old person with $100,000 should never buy $50,000 worth of unrated bonds that won’t mature for 10 years! Likewise, a 30 year old person may want to invest a retirement plan with professionally managed mutual funds instead of buying short-term certificates of deposit at a bank.

This sort of information is available in a wonderful series of articles and materials published on the internet at the website of the National Association of Securities Dealers at http://www.nasdr.com/basics_savings.asp. Investors should study the financial industry carefully and choose investments wisely. Remember, if something sounds too good to be true, it probably can’t be that good! Always work with experienced financial representatives, whose credentials are verifiably sound.

THIS ARTICLE IS NOT LEGAL ADVICE. ALWAYS CONSULT AN ATTORNEY DIRECTLY BEFORE RELYING UPON THIS ARTICLE OR CHANGING AN ESTATE PLAN.