Debunking Financial Myths Part 8 – Low Risk, Liquidity and High Returns
Our series resumes with one of the most dangerous myths of all . . . that you can get low risk, liquidity, and high returns all from the same investment. There’s no such thing, at least not in 2015. In 1980, when I was twelve, my grandmother, Hazel Holland, explained to me how certificates of deposit worked. She was earning 14%! Even at a young age, I understood. Those CDs had very little risk; they were fairly liquid, and most people would agree – 14% was a high return.
Today’s Reality: If you want an overall plan, for example, that has liquidity, low risk and the potential for good returns, then it’s necessary to combine several investments into one overall strategy. To do this, it is helpful to understand what different types of investments can and can’t provide.
Liquidity + Low Risk: Checking accounts, money market and savings accounts are good choices for your emergency funds and monies you expect to need within a year. However, they don’t provide much growth potential.
Liquidity + Growth Potential: Your choices in this category may seem endless, and include, load and no-load mutual funds, exchange-traded funds, bond funds, individual stocks and bonds, and preferred stocks. All of these investment securities also have the potential to decline significantly in value.
Low Risk + Growth Potential: Historically low interest rates have narrowed choices in this category to fixed annuities and index annuities. Most annuities have a commitment period and a fee for cancelling early, so they are not liquid beyond the 10% or so that can be drawn from them each year.
One Out of Three: It should be noted that some investments may only provide one out of the three, so their use may be more limited than choices that can pull double-duty. For example, REITs have income/growth potential, but they are risky and many are illiquid. Variable annuities, also, have growth potential, but they, too, have the potential for loss, and most have limitations on annual liquidity like fixed and index annuities. Of course, other examples could include: real estate, private mortgages, and rental property . . .
Get the Right Mix: For an effective overall plan, you’ll need to mix together the right investments in the right amounts. If you don’t know how, or aren’t sure you’re getting the proper mix for your situation, call me and I’ll help you PlanStronger™.