On a broad basis, there are a few main investment objectives to help you accomplish your goals. Understanding these objectives is important because certain investment strategies and products are appropriate for one type of goal but perhaps not for others. The following will provide an overview of the main investment objectives, as well as how you can set your own.
Goal: Capital Appreciation
Capital appreciation is an objective for achieving long-term growth. If saving for retirement is one of your objectives, the strategy to meet it would most likely be to invest in a qualified retirement plan where the investments work for many years.
This objective is not only limited to a qualified retirement plan; it can also be about wealth building over many years. With a capital appreciation objective, you need to be confident that your portfolio is going to grow over time, and not concern yourself with the day-to-day fluctuations of the market. You will want to watch for any changes with the companies you are investing in that could affect your long-term growth. And you should rebalance your portfolio if it strays from your asset allocation strategy.
Goal: Current Income
If your objective is to generate current income, you would most likely invest in stocks that pay a high dividend on a consistent basis, as well as highly rated bonds. People that pursue a current income stream may be retired and use the income for living expenses. Others may use this strategy to pay for certain needs, such as a college education, where they use the interest without touching the principal.
Goal: Capital Preservation
The objective is typically for those who want to make sure they don’t outlive their money, such as retired individuals concerned they don’t have enough time to recoup losses from a bad investment. Security is extremely important even if that means giving up return. To meet a capital preservation goal, the strategy would be to invest in bank certificates of deposit, U.S. Treasury issues, savings accounts, and fixed income bonds, such as municipal bonds, other government bonds, and corporate bonds.
How to Set Your Own Goals
Most experts agree that goals-based investing is the best approach to reach investment goals. With this method, you set investment goals based on reaching specific life goals, such as buying a home, saving for a child’s education, or saving for retirement. You consider each goal individually to set a time horizon and a risk level, so that you can develop an effective investment strategy.
To help you determine your comfort with risk and the time horizon of your goals, ask yourself these questions:
- What is your intent for investing this money?
- When would you like to withdraw your money?
- Do you want your money to achieve substantial capital growth by the time you withdraw it or are you more interested in maintaining the principal value?
- What is the maximum decrease in the value of your portfolio that you are comfortable with?
Setting Your Goals
Once you have a better understanding of why you want to invest and what you are hoping to achieve, you want to be very specific when developing your goals. Your investment objectives are the foundation of your investment plan, so don’t take them lightly.
There are various methods for setting goals, but one of the best to consider is the SMART goals format, which will help guide you through the process of setting your investment objectives. Following are the elements of the SMART format:
- Specific — make each goal specific and clear
- Measurable — make sure you define goals that can be measured
- Achievable — make sure it is realistic
- Relevant — make sure the goals relate to your life
- Time-based — assign a timeframe so that you can track your progress and know when it is achieved
After you have defined your goals, you will then want to determine a timeframe for each goal. You are not going to achieve all of your goals at once, so break them down by goal categories such as short, medium, and long term. You will then want to set a specific number of months/years in which you want to achieve each goal.
Once that is complete, the final step is to determine a dollar figure for each goal. Some goals will be easier than others to define a dollar amount. For longer-term goals, such as retirement, education, or starting a business, spend the time to research what each of these could cost.
Once you have your goals clearly defined in some type of format, it will make it much easier to develop an investment plan, as well as a budget that includes your savings goals.
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This newsletter was prepared by Integrated Concepts Group, Inc. The opinions expressed in this newsletter are for general information only and are not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney, or tax advisor with regard to your individual situation. The views expressed are those of the author and may not necessarily reflect those held by Randall Wealth Management Group or Vanderbilt Financial Group. Material presented is believed to be from reliable sources and PSEC makes no representation as to its accuracy or completeness.