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Here is a question I hear regularly: "My wife and I have been fortunate. We've got our bills paid, our kids are raised and life is good. As a matter of fact, we've saved a little money. What is the ideal investment for us?"

My usual response is, "What does ideal mean to you?"

The answer is often something like this: An ideal investment would have to have the following characteristics. First, it would have to have a high return. It should have a yield high enough to outperform inflation and taxes, plus a little more. Fifteen percent per year would be about right.

It must have complete safety. I have worked too hard to run the risk that I could lose any of it.

Next, it must always be liquid. I may need it at a moment's notice and I will want to be able to get at it quickly.

The ideal investment would also have no income taxes due on the growth of the investment. I would keep everything I earn on it.

It should not require much of my time. I would like it to work for me even when I am not around.

Lastly, it should be something I totally understand. I shouldn't have to learn any new skill or special knowledge to manage it. I don't want to have to worry about it and neither should my family after I am gone.

Okay, so what he wants is a worry-free investment with a high return, full liquidity, free from taxes and management, and no skill or talent required to manage it. Not bad.

Most informed investors would say to this fellow, "Get real, there is no such investment."

More than a few investors, however, have been duped into believing that such an animal exists. A lot of folks think real estate is the answer.

How about investments in second trust deeds? Limited partnerships? Tax deferred annuities? Stocks? Mutual funds? Many investments have been marketed this way. Promoters often say, "It's the perfect deal for you. Don't worry you will make a killing."

The process of selecting the best investment or investments for a particular need is made easier by answering a few basic questions.

1. Why are you investing? Is your need for current income or for a future need? The timing of the goal is critical. If you are not sure, don't invest until you are certain of your need for the funds.

2. How much risk are you willing to take? Ask yourself, can I afford to lose all or a part of the investment, and not have the loss affect how I live? Understanding your personal risk tolerance is essential before investing.

There are many forms of risk. There's market risk, economic risk and credit risk. There is also inflation risk and liquidity risk. If you don't understand every type of risk associated with a particular investment, then stay out of it. I am not saying that risk is avoidable; just invest with your eyes wide open.

3. Are income taxes a concern? Nearly every investment is taxed differently. The taxable return on one investment may push you into a higher overall tax bracket or cause your Social Security income to become taxable. Tax advantaged investments do not come free. If an investment has significant tax features, it may have some other features that may affect your financial status. Find them and understand them.

4. What is the economic outlook? You must look at the economy from the big picture perspective as well as your personal perspective. What happens in the community, state or world may seriously affect the return on your investment. Your job stability, your health, your family status, and many other personal economic issues may also impact your ability to invest in one type of investment or another. It's not just a simple matter of plunking down your money.

5. Is the skill and knowledge needed to manage the investment available? Nearly every investment requires some form of management — some more than others. Most investors opt for professional management. They may pay a price for it, but it is usually worth the small price. My advice is to clearly understand the work involved and what it costs to have someone else manage the investment if you don't or can't do it yourself.

6. How much money is available to be invested? Investment choices are often limited by the amount of money available to invest. It may take hundreds of thousands to buy a successful business while less than a hundred to start a mutual fund account. Also, be careful to know all the costs of the investment. Some investments require a never ending addition of capital in order to keep the investment afloat.

As you see, it takes a little planning, a little thought. If after answering these questions, you are not sure about the investment, back off. Take your time to do it right with full understanding and disclosure about the deal.

Tom Mills can be reached at 650 Imperial Way, Ste. 103, Napa CA 94559; 254-0155; fax, 254-0158; or e-mail sunmd@aol.com.

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