Financial planners have a very difficult task: They must invest their clients' money in diverse portfolios that (hopefully) will increase in value over time, not decline. A broker who has lost money for a client suffers from a damaged reputation and could even face suit if he's made promises he couldn't keep.
In outlining a program of investment, the author, of necessity, must assume certain things about the investor, which may or may not be true, and he must in some measure attempt to advise the investor and substitute his judgment for that of the investor.
This is unfortunate, but there is no alternative. It is hoped that the investor will realize that these are only recommendations and that he is the one who must ultimately decide where to invest in light of his needs and desires and of all the facts. The best that can be done to make this situation clear is to outline the principles, which underlie the presentation of the investment programs.
The first characteristic of an investment, which has been stressed, is safety of the capital. A large proportion of investors and potential investors want to know that when they invest $10,000 they are going to get back $10,000, not $9,000 or $4,000, as a result of a declining stock market or for other reasons. This preservation of the amount initially invested is an underlying principle of this article. While the stock market is in many ways an excellent opportunity for investment there is no assurance whatever that if a person puts in $10,000 he will get back $10,000, and the desire to preserve the amount originally accumulated is considered to be a primary objective of a great proportion of investors.
Certainly the stock market should not be ignored, and stocks should be purchased by a large proportion of investors; but there are other things in which to invest money, and some of these other things may provide for the preservation of capital better than the stock market. Yet to assure growth in line with the development of the American economic machine, stocks should be included in the portfolio of many, if not most investors.
The second important characteristic of an investment should be yield. The whole purpose of the book is to show that while banks preserve the number of dollars of an investment well, they do not provide the high yield that many investors would like and can secure without a dangerous increase in the risk. The banks secure higher rates than what they pay depositors, and their high rate business cannot be considered unduly risky. There must therefore be a number of places in which funds can be placed with relative safety which at the same time give the investor a larger percentage return on his capital.
The third important characteristic is tax benefits, especially for the higher income investor. When one is in the 91 percent tax bracket there is little point in running any risk to earn an extra $10,000 a year when he can keep at most $1,000 of it. For these higher income investors there must be an emphasis on types of investment that will allow them to keep more of the extra $10,000.
In order to meet these general criteria of investment, namely relative safety of the capital, high yield and tax benefits, certain investment principles must be followed.