Investor’s Checklist: Questions to Ask When Creating Your Investment Strategy

1. Do I currently have any savings and investments?
   ◻Yes
   If yes, what percentage of my investments are in:
   ◻% Cash or cash equivalents (savings accounts, CDs, money market funds)
   ◻% Bonds or Bond funds
   ◻% Stocks, stock funds, or stock in the company I work for?
   ◻No
2. Is the total of my investment in cash, bonds, and bond funds less than 15% or 20% of my total investments?
   ◻Yes
   ◻No
3. I have a lump sum to invest.
   ◻Yes
   ◻No
4. I expect to invest on a regular basis.
   ◻Yes
   ◻No

Perspective

Most personal financial advisors recommend that investors maintain a diversified investment portfolio consisting of bonds, stocks and cash in varying percentages, depending upon individual circumstances and objectives. For example, older or retired investors may typically have a higher proportion of bonds in their portfolio than younger investors. Whether you already have investments in stocks or bonds or are just beginning to invest, diversity can provide some protection for your portfolio, so if one sector or asset class is in the midst of a cyclical downturn, the rising value of another class of assets may help offset the negative impact.

1. To provide income to use toward my current expenses?
   ◻Yes
   ◻No
2. To save for retirement?
   ◻Yes
   ◻No
3. To save for children’s college education?
   ◻Yes
   ◻No
4. To accumulate capital?
   ◻Yes
   ◻No
5. To preserve capital?
   ◻Yes
   ◻No
   Other (such as a short-term goal):

Perspective

Because bonds typically have a predictable stream of payments of interest and repayment of principal, many people invest in them to receive interest income or to preserve and to accumulate capital. If you are looking for current income, you will most likely be interested in bonds that pay an interest rate that stays fixed until maturity with interest that is paid semiannually. However, if you are saving for retirement or a child’s education or other capital accumulation goal, you may wish to consider investing in zero coupon bonds which do not have periodic interest payments. Instead, they are sold at a substantial discount from their face amount and the investor receives one payment–at maturity–that is equal to the purchase price (principal) plus the total interest earned, compounded semiannually at the original interest rate.

◻1 year
◻5 years
◻10 years
◻20 years
◻30 years or more
◻Other

Perspective

A bond’s maturity refers to the specific future date on which the investor’s principal is expected to be repaid. Bond maturities generally range from one day up to 30 years. Your choice of maturity will depend on when you want or need the principal repaid and the kind of investment return you are seeking within your risk tolerance. Generally, the longer the maturity, the greater the return.

◻Very little risk. I want the safest investments possible.
◻Modest risk. I’m willing to accept moderate risk of losing my investment if it means I will earn a higher return.
◻Substantial risk. I want the highest possible yield and I’m willing to accept the chance that I may lose my investment.

Perspective

Virtually all investments have some degree of risk that you might lose some or all of your investment. When investing in bonds, it’s important to remember that an investment’s return is linked to its credit as well as market changes. The higher the return, the higher the risk. Conversely, relatively safe investments offer relatively lower returns. Bond choices range from the highest credit quality U.S. Treasury securities, which are backed by the full faith and credit of the U.S. government to bonds that are below investment grade and considered speculative. In assessing your tolerance for risk, ask yourself, “What will I do if my investment is not there when I need it?” You should also be aware that if you have to sell a bond before it matures, you will receive the prevailing market price, which may be more or less than its original price. The value of bonds fluctuates with the market, varying in the opposite direction of movement in interest rates. Bond funds’ values fluctuate in the same way.

What federal income tax bracket am I in?

◻ 10 percent
◻ 12 percent
◻ 22 percent
◻ 24 percent
◻ 32 percent
◻ 35 percent
◻ 37 percent

Is my investment going to be made through a tax-preferred investment vehicle?

◻Traditional IRA
◻Roth IRA
◻401(k)
◻Pension plan

Perspective

Some bonds offer special tax advantages. There is no state or local income tax on the interest from U.S. Treasury bonds. There is no federal income tax on the interest from most municipal bonds, and in many cases no state or local income tax, either. Do you want income that is taxable or income that is tax-exempt? The answer depends on your income tax bracket–and the difference between what can be earned from taxable versus tax-exempt securities–not only presently, but also throughout the period until your bonds mature. The decision about whether to invest in a taxable bond or a tax-exempt bond can also depend on whether you will be holding the securities in an account that is already tax-preferred or tax-deferred, such as a pension account, 40l(k) or IRA: for example, a municipal bond will not bring you the tax benefits it otherwise might if you hold it in a tax-deferred account. In addition to help you can get from your broker or financial or tax adviser to determine what is the best for you, many brokers and mutual fund companies offer calculators you can use yourself on the Internet.

◻Individual bonds?
◻Bond funds?
◻Unit investment trusts?

Perspective

There are several ways to invest in bonds. You can buy individual bonds, bond funds or unit investment trusts. Your choice will depend on the amount of money you have to invest in order to achieve diversification, the degree to which you want professional management of your portfolio and your willingness to pay for professional selection and portfolio management (bond funds). Generally, investing in individual bonds is best for preserving your capital assuming they closely match your other objectives (like maturity); while bond funds offer convenience and diversification even at minimum investment levels. The minimum investment for bond funds and UITs is typically between $1,000 and $2,500, and $500 for retirement accounts. Individual bonds are usually sold in $5,000 denominations and dealers sometimes require a minimum investment of $20,000.