You may have been having a mini investment-existential crisis and you’ve been wondering about the meaning of it all. What is life, and what is an investment? What should my investment objective be?
An investment objective is quite a basic of goal for an investor or a trader has for their portfolio. It is usually in the form of a Q&A that determines the client’s aversion to risk, also known as risk tolerance, and how long the money is to be invested for the time period.
Take a piece of paper and a pen and write down the answers to these questions. By doing this, you’ll be able to figure out your investment objectives and set the goals for your portfolio.
- What’s my estimated annual income and net worth?
- When would I like to withdraw my money?
- What are my average annual expenses?
- Do I want the money to achieve substantial capital growth, or am I more interested in maintaining the principal value?
- What’s my goal for investing this money?
- What’s the maximum decrease in the value of my portfolio that I would be comfortable with?
- Where is my true level of knowledge with regards to investment products, such as mutual funds, stocks, derivatives, fixed income, etc.?
Basic Investment Objectives
The options for investing savings are continually increasing. These options can be categorized according to three fundamental characteristics: safety, income, and growth. Also, those options also correspond to investor objectives.
Safety
Unfortunately, life is tricky and there is no such thing as a completely safe and secure investment. However, we can get close to ultimate safety through the purchase of government-issued securities in stable economic systems. You could also purchase corporate bonds issued by large and stable businesses. Such securities are arguably the best means of preserving and receiving a specified rate of return. Usually, the safest investments are in the money market.
Income
The safest investments are those that have the lowest rate of income return or yield. Take note and remember, as the yield increases, so does the risk. As a result, investors need to sacrifice a degree of safety if they want to increase their returns. Most investors want some level of income generation in their portfolios, even if it is just to keep up with the economy’s rate of inflation.
Capital Growth
Capital gains are entirely different from yields in that they are only realized when the security is sold for a price that is higher than the rate at which it was initially purchased. Usually, the growth is most closely associated with the purchase of common stock. If you want to go in-depth, the most secure ones are growth securities, which offer low yields but a considerable opportunity for an increase in value.
Secondary Objectives
Tax Minimization: As an investor, you may pursue certain investments to leverage tax minimization as part of your investment strategy. During your investment journey, make sure to contribute to an IRA (Individual Retirement Account) or another tax retirement account type, such as a 401(k). It can be an effective tax minimization strategy.
Marketability and Liquidity: Achieving a degree of liquidity requires the sacrifice of a certain level of income or potential for capital gains. If an investor seeks cash, money market assets and non-tradable bonds are not likely to be in their portfolio.
Common stocks are often considered the most liquid of investments because they can be sold within a day or two.
Some key takeaways for you!
- An objective helps an investment manager or advisor determine the optimal strategy for achieving a client’s goals.
- You can often determine an investment’s objective by using a questionnaire.
- An investor’s risk tolerance, physiological readiness, and the prospective time period are the three main parts of determining an investment objective.
Well, as you saw, choosing a single strategic objective and assigning weightings to all other possible objectives is a long process. You have to put some work and a lot of thought into it! Remember you need to spend the appropriate amount of time and effort in finding, studying, and selecting the opportunities that match your objectives. All of your objectives and results depend on such factors as your temperament, stage of life, marital status, or family situation. Every investor can determine the appropriate amount of investment opportunities suitable for him or her. You can make your own way to a successful investment. Take hold of it.
