What is an Investment Objective?
What Is an Investment Objective?
Understanding one's investment objectives is vital to creating a successful investment strategy. Often, people ask us where they should be investing. Usually, this question is followed up with a question or statement about an investment they heard about or some potential development in the market. These are all great questions. However, these questions center around a generally expected outcome without addressing the objective.
Everyone wants to see their account value increase and avoid any potential downside. But, every investment has risk associated with it. Not all risks are market risks. The main questions individuals should ask before investing should center around how much time the individual has until the funds are needed, how much risk the individual wants to take on, what type of risks are acceptable, and what the assets are intended for.
Investment objectives are investors' goals when they put money into an investment. Investors have different objectives based on risk tolerance, time horizon, and financial goals. Investment objectives can be broken down into other sub-categories, but you typically see three basic categories. Typical objectives include capital preservation, income generation, and growth.
Types of Investment Objectives
Capital Preservation
The main objective of capital preservation is to maintain the purchasing power of an investment. This objective type is most suitable for investors nearing or in retirement, as it minimizes the risk of losing principal. To achieve this goal, investors should focus on lower-risk investments, such as government bonds, certificates of deposits (CDs), and money market accounts. These investments generally provide a greater potential for a steady income stream and relatively low volatility.
Keep in mind that lower risk does not provide any guarantee of avoiding losses. Nor does it assure the portfolio will maintain purchasing power against rising inflation, though that should be a goal to consider when making such investments.
Income
Another essential investment objective is income generation. This objective is particularly relevant for investors looking for regular income from their investments, such as retirees who rely on their investment portfolio for financial support.
To achieve the income objective, investors can consider investing in assets with the potential to provide consistent cash flow, such as dividend-paying stocks or bonds. Dividend-paying stocks are shares of companies that can distribute part of their profits to shareholders in the form of dividends. On the other hand, bonds are fixed-income securities that pay periodic interest to bondholders.
Investors should carefully assess their income needs and choose investments that align with their income requirements. It is also essential to consider the risk associated with income-generating investments, as higher-yielding assets may come with higher levels of risk.
By diversifying their investments across different income-generating assets, investors can have more potential to create an income stream to meet their financial needs.
Growth
Growth is another vital investment objective that many investors pursue. This objective is to increase the value of investments over time. Investors seeking portfolio growth may invest to maximize the potential for capital appreciation to build wealth.
To achieve the growth objective, investors can consider various strategies. One common approach is investing in equities with higher growth potential. Investing in growth stocks can be more volatile compared to other investment options, but they have the potential for higher returns.
Another strategy for growth is investing in mutual funds or exchange-traded funds (ETFs) that focus on growth-oriented industries or sectors. These types of funds pool money from many investors to invest in a diversified portfolio of growth stocks. This diversification helps reduce the risk associated with investing in individual stocks.
The growth objective may require a longer time horizon than other investment objectives. Investors should prepare to stay invested for a significant period to allow their investments to grow and potentially benefit from compounding returns.
The growth objective focuses on increasing the value of investments over time. By investing in growth-oriented assets such as stocks or equity funds, investors can potentially achieve higher returns and build wealth. However, it is crucial to carefully assess the associated risks and have a long-term perspective when pursuing this investment objective.
Conclusion
Before investing, it is critical to understand your investment objective and assess its potential risks. Though we discussed three main investment objectives, you can break these down into additional sub-categories. This blog post is intended to provide a high-level view of investment objectives and is not investment advice. Talk to a professional before investing.
CUI Wealth Management can help you review investment objectives and provide tailored investment advice for your unique situation.