This is our first podcast answering questions that we receive.  The first question I’ll address is: What should I consider before investing?

3 things to consider before investing

First – make sure they have a prudent reserve.  It is recommended that people have liquid assets to cover about 3-6 months of living expenses.  They should be invested in very short term non-volatile holdings such as money market or a short term bond fund.  The idea is to have money available if something was to happen so you are not caught in a difficult situation and need to rely on high interest credit cards or borrowing from your mother-in-law.

For example, if you were in an accident and needed to cover expenses without income for a while or if you need major car or home repair, the prudent reserve is there to cover deductibles and other needs.  For some people with adequate insurance and low deductibles, this can be on the lower end of the range.  For many self employed people without significant insurance, it may be advisable to exceed the recommended range.  It is important to review your insurance coverage.  Right now returns are very low for short term, high quality holdings.  I have found that the best bank and credit union returns can be found with on-line banks. is a site that allows you to sort returns on savings, money market, and CDs by bank.

Second – consider your tax situation to determine what type of account would be best and which assets should go in which account.  There are many factors in determining if a Roth IRA, traditional IRA, brokerage account, 401k, … is best.  We will look at that decision in the future, but here I just want to point out that that is something that needs to be evaluated.  Your tax situation will also influence the types of investments you choose.  For example, if you are in a very high tax bracket, some of your fixed portfolio in a taxable account may benefit from tax free municipal bonds.  For others, the higher return of corporate bonds may be more appropriate.  Capital gains should be considered before making any sales in taxable accounts so that you are aware of the tax implications.  Capital gains are generally the amount your investments have grown since you purchased them.  You need to pay taxes on that growth (at a lower rate than income taxes).

Third – understand your spending needs.  Even if you just have a rough idea of your spending plan, it will give you an idea of when you will need this money you want to invest.  There are different distributions of assets (fixed (bond)  vs equity (stock) investments) that will be more appropriate depending on the time period that investments will be used.  For funds that are needed within the next two years, a very conservative balance is recommended.  For investments needed between two and seven years, a moderate balance may be used.  More aggressive (heavier in stocks) distributions can be used for investments that are not needed for more than seven years.

Fourth – and one of the most important pieces of information to help determine how you should be invested is risk tolerance.  One of the worst things you can do is invest in stocks and sell when the market is down because you are nervous about the future.  Equity (stock) investments work best for you if you can hold them through the ups and downs.  In fact I recommend that you rebalance regularly, which means buying more when they are down.

Thank you for reading this blog.  Please let me know if this was useful for you.  If you have any financial questions please send them to me and I will answer as many as I can.

Bill Holliday is a Certified Financial Planner with AIO Financial.  Please contact us at (520) 325-0769

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