08 Jan A safe and sound investment with a 12% return?

 Q. I am looking for safe and sound investment for $20,000 that can give me at least a 12 percent return on investment. Please suggest any kind of investment either stock or bond or real estate or any.

A. Brace yourself.

“And I would like a chateau in the south of France,” joked Altair Gobo, a certified financal planner with U.S. Financial Services in Fairfield. “Oh, by the way, you forgot liquid and tax-free!”

Gobo said when he sees the words “safe, sound and 12 percent” in the same sentence, it makes him wonder:

1. Is this a joke?
2. Or, there’s a missing decimal point, i.e. 1.2 percent?
3. Is the person asking the question so naive as to think an investments that meets these requirements really exists?

“There is a fourth option: this person was abducted by aliens in 1979 when Jimmy Carter was president and CDs were paying 12 percent,” Gobo said.

Seriously, basic 101 investing says the higher the return a person is seeking relative to “safe” investments such as Trearuries and CDs, the more risk they must be willing to assume, Gobo said.

“`Safe and sound’ doesn’t sound like the words used to describe the willingness to take risk,” he said. “Your expectation for return in our current environment based on your appetite for risk should be in the vicinity of 2 to 3 percent.”

Indeed, when considering investment options, the first and most important step is to assess your risk tolerance.

“The ability to stomach risk varies greatly, and is impacted by the goal for the investment, the timeline for needing the money, and behavioral factors that can override even the best investment plan,” said Jody D’Agostini, a certified financial planner with AXA Advisors/The Falcon Financial Group in Morristown.

She said studies have shown that people feel much more pain when they lose money than corresponding joy when their investment returns are positive.

There is no such thing as a “safe and sound” investment which gives at least a 12 percent return, D’Agostini said, when “safe” suggests that there is little to no chance of the investment losing money.

“The average annualized return for the S&P 500 over the past 30 years has been over 10 percent, but this type of return would be found in an all equity portfolio that has seen periods of great volatility which may not be appropriate for you,” she said.

Generally speaking, the higher the potential return, the greater the risk. This runs counter to being “safe and sound.” “Safe” investments historically return between 3 and 5 percent, but currently are returning much lower, D’Agostini said. These also have risk, which would be the potential to lose principal, potential illiquidity, and decreased purchasing power due to the effects of inflation. Examples of these would be an FDIC-insured bank account, Treasury bonds or annuities.

At the very least, you should strive to establish an emergency fund that holds the amount equal to three to six months of your living expenses, she said.

“As you get closer to your retirement, it is a good idea to increase the amount kept in `safe investments,'” D’Agostini said. “All of your investments should be considered in light of your financial plan; in other words, first consider what your overall goals and objectives are and what the timeline is for each. Once this is known, it will be easier to select the investment choices that are appropriate for you.

And Gobo has a word of warning.

“Once your expectations become more realistic, keep in mind if you hear of something that sounds like it’s too good to be true, it probably is too good to be true,” he said.

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This story was first posted in January 2015.