Investment objectives are the fundamental reason you are investing and they might just be the most important part of investing. Think of your objective as your destination in the journey of investing — without a place to go, you’ll just be wandering around. Likewise, without an objective, you’ll just be investing willy nilly without a goal.
Defining the purpose that a portfolio serves dictates what types of investments are needed to fulfill the purpose. When determining your own investment objectives, ask yourself a few key questions:
What is the purpose of your money?
Your investments can have many purposes, from retirement to funding a small business, to funding your children’s education. By earmarking your investments’ final destination you put some real oomph behind those investments. You’re not just funding your account for the fun of it, you’re making sure that Future You has a nice beach house when they retire.
How much time do you have until you need this money?
Realistically, most of us will continue to work well into our sixties, but maybe you want to check out earlier. A popular goal these days is to fund a mini-retirement type of sabbatical once every ten years or so. If your children are in elementary school now, you have a cool decade before you send them off to the dorms. Whatever your goal is, figure out when you’ll want to use the money.
How much risk are you willing to take to achieve above-average returns?
Ah, risk. Understanding risk and your tolerance for it is key in creating a workable investment strategy. You should have a realistic understanding of your ability and willingness to handle large swings in the value of your investments; if you take on too much risk, you might panic and sell at the wrong time. On the flip side, if you play it too cool you may miss out on big gains in the market.
Do you want your money to grow or do you want to preserve its current value?
With lots of time on your side, your natural instinct may be to grow your money as much as you can. With not so much time you may want to swing to the other side and just focus on not losing what you’ve worked hard for. Investing to preserve value may seem counterintuitive, but remember: the average savings account pays just under 1% interest and inflation typically hovers around 3%. So even if you park your money in savings it may lose value over time.
Where do you want your money?
Regardless of your strategy, when you invest in a company you are pledging support to their efforts as a company. More than ever, thanks to the transparency afforded to investors by technology, people are choosing to invest in companies that align with their values. The opportunity absolutely exists to balance your desire for returns and your ethical standpoint.
Public, for example, organizes curated themes of stocks that align with the way you actually experience companies in everyday life. Interested in companies that actively support green practices? Check out the Clean and Green category. They also offer themes like SaaS-y and Tech Giants for those who want to invest in the software and technology industries. There’s even a theme for brands that are new to the market, New Kids on the Block.
Can an investor have different objectives simultaneously? Definitely. Don’t feel like you’ve made an error if you can’t pinpoint just one objective that matches your goals, that just means you’ll need to run simultaneous strategies. If you’re having trouble defining your objectives or find these questions too limiting, here are some other considerations:
- Income level. Investors with higher income may be more inclined towards riskier strategies because they can contribute capital if they face any losses.
- Tax circumstances. Capital gains tax is real and a shock to many. Income shifts can bump you up in tax brackets and shake up your whole strategy.
- Total wealth. The value of your expected pension or a guaranteed inheritance could influence your risk tolerance and shape your portfolio choices.
- Employer-funded retirement. Does your job have an adequate retirement plan, or will you have to use your investment portfolio? Do they offer a contribution match? If your employer offers a retirement plan and you do not contribute enough to get your employer’s maximum match, you are passing up free money.
Your answers to these questions will help define your objectives and shape the investment portfolio, or portfolios, that you’re putting together.
So, let’s say that you’ve answered these questions and: the purpose of your money is for retirement, and you figure you have at least 20 years until you need it. You are pretty comfortable with risk, and you want your money to grow a healthy nest egg so that you can retire comfortably.
How objectives shape your investment strategy
There are three main characteristics that every stock falls into: safety, income, or growth.
Safety investments, with the caveat that no investment is ever “safe,” are ones made into the money market with the purchase of government bonds and bills. These investments are generally considered to be safe and in turn, do not offer very high yields. They are an excellent instrument to preserve capital while generating a modest rate of return.
Income investments are generally made by purchasing corporate bonds and bills, annuities, or real estate investments. These offer the opportunity to generate a monthly income from the yield, which tends to be a bit higher to coincide with a slightly elevated risk.
Growth investments are those made by purchasing stocks of publicly traded companies and are best meant for long-term growth. The average returns of investing in the stock market are much higher than with other types of investing, which again coincides with the risk. A long-term mindset is essential when investing for growth.
If growth is your goal, consider dollar-cost averaging. Using this method, you can protect yourself from the risk of investing all of your money at the wrong time by following a steady rhythm of funding over a long period of time. By making regular investments with the same amount of money each time, you will buy more of an investment when its price is low and less of the investment when its price is high. This is an especially sound investment strategy in a volatile market.
With any goal, balance is key and is only achieved by an occasional adjustment. Rebalancing ensures that your portfolio does not overemphasize one or more assets, accidentally putting you into an uncomfortable area of risk. Shifting money away from a stock when it’s doing well may not be easy, but it can be a wise move. By cutting back on the current “winners” and adding more of the current so-called “losers,” rebalancing pushes you to buy low and sell high.
Many financial experts recommend that investors rebalance their portfolios on a cycle, such as every six or twelve months. Setting regular check-ins with yourself and your portfolio is a great way to ensure that you’re on course toward your goals.
Bottom line
Without a plan, your investments have no focus. In order to identify your plan, you need to identify your investment objectives. You may have more than one at a time, and that’s OK; what’s important is to recognize them and act accordingly. There are a few key questions that an investor can ask themselves to get on track.