The chance of realizing your financial goals is greatly increased when you choose suitable investments. Depending on your objectives and time frame, some investment vehicles may be more appropriate than others. Just like you choose your vehicle to get to work carefully (car, bus, or bike), choose the vehicles for investing your money carefully (stocks, bonds, mutual funds).
To achieve long-term growth (i.e., funding your children’s education or retirement), stocks or stock funds might be wise choices. Historically, stocks are the investment class that has consistently increased in value, though it is also one of the riskiest. If your financial goal is far on the horizon, you have the time to weather any bumps or downturns that the market might make and still be able to reach your target.
In order to meet your short-term goals (i.e., going on vacation, preparing a simcha, or buying a large ticket item), it is recommended to invest in short-term certificates of deposit (CDs) or money market mutual funds. These investments offer little risk and high liquidity. Your money will be accessible when you need it.
If your goal is to earn investment income (to supplement other income), consider investing in bonds, preferred stocks, or bond mutual funds. This way, you have a reasonable sense of how much you should receive and when you should receive it. The predictability of bonds makes them an especially appropriate investment vehicle for retirees. However, there are risks in these programs, too, so be sure to investigate carefully before investing.
To minimize taxes, consider investing in tax-advantaged investments. Work-related retirement accounts (such as bituach minahalim or an American IRA, if appropriate) serve to encourage savings by reducing or eliminating the tax bite out of your profits. Since taxes are not due on assets within these pension accounts, money can grow at a faster rate than would be possible if taxes were eating away at it. After you retire, you can begin to redeem these savings. For dual citizens, be sure to consult your accountant to understand all the tax ramifications of these and other similar programs.
Having your funds allocated in the most suitable investment vehicle is not a guarantee that your fiscal goals will be met. But, boarding the proper vehicle is the first step towards reaching your destination.
All roads may lead toRome, but the journey is more pleasant by limousine than pedaling uphill on an old bicycle.
Douglas Goldstein, CFP®, is the Director of Profile Investment Service, Ltd., which specializes in helping people who live in Israel with their US dollar assets and American investment and retirement accounts. He helps olim meet their financial goals through asset allocation, financial planning, and using money managers.
Published September 2, 2012.