An investment objective (in terms of personal finance) is considered to be an assumption that is served by a specific portfolio created for the financial needs of an individual or client of an investment advisor. Once the objective is established, it will determine what particular asset classes and types of collateral are needed to achieve it.
In other words, the investment objective is the primary reason why you invest. The investment objective may also determine how the investment fund invests its portfolio. For example, when it comes to mutual funds, the objective specified for a particular fund is described based on the wording in the fund’s prospectus.
Defining the investment objective for individual investors
An investment objective can be thought of as an answer to the basic questions you should ask yourself before you start building a portfolio.
- What is the purpose of your money?
- What do you want them to do?
- How much time do you have until you need the money?
- How much risk are you willing to take to achieve above-average returns?
- Do you want your money to grow?
- Or do you want to maintain their current value?
The answers to these questions will help you arrive at your investment timeframe and risk tolerance, which are essential elements in determining your investment goal.
For example – if the goal of your money is retirement and you estimate that you have at least 20 years to reach that age, you have a long-term goal. Assuming your risk tolerance is not low, an adequate investment fund objective would generally be classified as “growth.” Therefore, in order to diversify your portfolio, you would need to look at stock mutual funds, as well as other mixed funds.
Examples of investment objectives and basic investment types
Your investment objective could be considered growth, but it could also be income or preservation of current value if you are retired. It may be some combination or variation of these three types. For example, some investors want to increase their account value over time, but they also want to earn some income from that investment. Therefore, such an investment objective can be considered growth and income. The capital preservation objective usually seeks to maintain stable account values or a minimum increase at a rate equal to the expected rate of inflation. This usually ranges from 2.5% to 4.0%.
Before you start investing, make sure you define your own investment goal. Then you will be able to match it with the investment funds’ goal and select one that is suitable for you.
How do you set an investment goal?
Learning to set investment goals is one of the most important things you can do as a new investor. It helps you keep track of where you have been, where you are and where you are going as it relates to your personal finances and your path to financial independence.
Quality of investment targets
The best investment targets tend to have three common characteristics:
1. good investment objectives are measurable. This means they are clear, concise and specific. The statement: “I set a goal of saving 50 dollars a week” is meaningful because you can evaluate your finances and determine whether you have succeeded or not. You may or may not have saved 50 dollars per week. On the other hand, saying something like: “I’m going to set a goal of saving more money every year” is somewhat useless because it doesn’t hold you accountable.
2. good investment goals are reasonable and rational. If you decide that you want to reach one million in your personal net worth by age 40, you can use methods such as the time value of money formula to assess whether your current savings rate is sufficient. You won’t get there by putting away £5,000 a year between the ages of 18 and 40 while maintaining your historical and probable rate of return. That means you need to either lower your expectations or increase the amount of money you put away each year.
3. good investment goals are in line with long-term plans. This information is worth repeating over and over, because it seems that a large percentage of people are programmed so that money is the only thing that matters to them. Money is a tool that should exist to serve you. Nothing else. The only purpose of money is to improve the quality of your life, to give you something to experience more happiness and utility. You shouldn’t end your life with a tremendously large balance if it means you have to sacrifice everything valuable in life to achieve it and eventually die, leaving the fruits of your labor to heirs who are irresponsible or who are not grateful for what you have bestowed upon them. Sometimes it’s better to have less savings but enjoy life more than you would enjoy in the opposite situation. The trick is to make sure you wisely balance your long-term and short-term desires in a way that maximizes enjoyment. There is no formula for this, as only you can determine what trade-offs you are willing to make and which sacrifices bring greater rewards.
The most important questions when setting investment goals
Once you sit down and begin to develop your investment goals to achieve financial independence, ask yourself the following questions. They will help clarify some of your hidden assumptions. This can be a particularly useful exercise if you are married, because many times spouses are not aware that they are aiming for different starting points when it comes to financial matters.
1 What is “your number”? What is the monthly passive income you would need to achieve financial independence from your portfolio if you withdrew no more than 3-4% of the base value of your investments each year? This is the amount of money you would need to live on your capital without having to sell anything and enjoy your desired standard of living.
2 – What is your risk tolerance? No matter how successful you are or how much money you accumulate, some of us are programmed in such a way that fluctuations in the value of our portfolio lead to a huge emotional crisis. They would rather end up with less money in the future and enjoy a lower interest rate but a calmer growth rate. Being able to be honest with yourself about what’s going to happen in this area is a big part of financial maturity. For example, while this may put you at a great disadvantage in most cases – you don’t have to own stocks to build wealth. There are other asset classes that can work for you and that have the ability to create capital. At the same time, throw away dividends, interest and/or rents.
3. How do your moral and ethical values influence your portfolio management strategy? Each of us is part of the world. Our actions and decisions affect those around us for better or worse. How do you want to invest your money? Do you feel comfortable owning shares of tobacco companies? What about the stocks of weapons manufacturers? Do you have a moral problem with acquiring shares of alcohol distilleries? Energy companies that have a large carbon balance sheet? When the moment of pressure comes, you have to decide what you can live with in terms of income generation, and what is too much of a hurdle for you.
4. Do you plan to spend all your capital over your lifetime, or do you want to leave a legacy? If you spend all of your capital, you will enjoy a higher payout rate than if you do the opposite. If you don’t, you’ll get a smaller share of the passive income stream from your assets, and your main capital should grow, provided it’s managed wisely. Then it will also serve as a legacy. Determining the right answer depends on many factors, but the starting point is that someone else will spend the money. You need to make sure that this is the person you want to give it to even if it is yourself. Moreover, if you leave money for others, will you do it directly, without any obligation, or will you set up a trust fund?
5. will you limit your investments to your home country or will you expand them worldwide? Despite the surge of nationalism that began in 2016, the forces of globalization are real, they are powerful, and they mean that anyone with access to a brokerage account can become a business owner around the world. You can be a miner in a mine and collect dividends from Switzerland, Britain, Germany and Japan. You can be a teacher in Danzig and collect money from companies in Canada and France. While this introduces additional risks associated with permanent capital losses, as well as other risks such as currency and political risks, it also offers greater diversification and potential exposure to market performance that may be better than what would be available in a domestic portfolio alone.
6 What motivates you to achieve financial independence? While some people are natural savers – they tend to accumulate without needing a reason because they live below their means and know what to do with the surplus – most people are driven by some sort of primary or secondary motivation. It is critical that you look within yourself and honestly answer the question, why? Why do you need to save? What makes you want to invest rather than spend the money that flows through your hands? Often, by getting to the bottom of this question, you will better design your portfolio and achieve what you are really striving for.
Read also: 7 investment tips for safe investments
7 – Are you emotionally capable of managing your portfolio yourself? This question can be difficult for some of us, because by feeling honest with ourselves we will be admitting personal inadequacy. This is nonsense. The goal is to get what you want out of your portfolio, not to prove that you are a master investor. Vanguard, one of the largest asset management companies that funds both active and passive mutual funds and ETFs, estimated in one of its publications that a typical investor could add a net 3% or more to their current investment returns. All it takes is hiring one of the advisors using the model outlined in their argument. High investment advisory fees are more than offset by a combination of behavior modification, tax advice, financial planning assistance and other services that benefit the client in some way.
8. how do different asset classes interact with your personality and temperament? I have already touched on this question, but it is a bit different and needs further discussion. Society is diverse. Each of us is programmed differently. We have our own unique tastes and annoyances. Things that make us happy and things that irritate us. It’s like some people prefer beef and others prefer chicken. We have many ways to make and invest money in this world. Think about real estate for a moment. Real estate existed long before stock markets existed. Along with credit, it is one of the oldest ancient traditions. You acquire a piece of real estate that someone else wants to use. You let him use it for a predetermined period of time within a series of obligations and social and cultural norms that define the specifics of the contract. In return, you receive money, which is called rent. However, among your obligations, you have to make sure that the property is maintained satisfactorily. If you specialize in the residential sector and the toilet breaks down in the middle of the night, you pick up the phone. Unless you pay a property management company to take care of these issues for you. Your tenant may have an addiction problem and sell your appliances. He may be a hoarder and damage your apartment so that it is stigmatized by your neighbors. It’s a trade-off. These potential problems are among the costs you must bear if you want to enjoy the income from your property.
9. There is no real way around this problem. This is life. Personally, I don’t find it attractive. As a result, I started focusing on publicly traded companies and securities. I’m all about common stocks because those trade-offs are smaller and don’t bother me practically at all. If I were to ever delve into real estate investments in any meaningful way, it would most likely be commercial real estate because of the longer lease terms and the fact that I will be negotiating with corporate clients rather than individuals. It fits better with who I am. I’m not saying that I would never consider residential real estate, but I am aware of the trade-offs and would need a unique set of circumstances to get through this particular market.
10. What is your time horizon? Even if a particular asset class or investment fits your personality, temperament, net worth, personal situation and preferences – it doesn’t necessarily mean it’s the right fit. Because you need to consider the time horizon over which you will need to use it to get liquidity. Let’s say you have an extra 100,000 dollars to use, but you know you’ll need the money in five years. No matter how attractive the opportunity is, even if you’ve been given the chance to invest in a great business, it’s probably not wise for you to make the investment because you need a solution that can’t be realized – that is, getting the cash back in 60 months.
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