Investment Objectives

Setting clear objectives for your investments are central to their meeting your needs.

Not having investment objectives aimed at your specific financial needs is like getting into a car and driving around aimlessly without a map--it doesn't matter how fast or slow you go because you are not reaching anywhere. This is not merely a waste of effort but can actually be harmful to you because if you don't know whether to turn left or right at a junction, you increase the chances of making a mistake or worse, causing an accident. It is exactly the same with your investments.

Setting clear investment objectives is critical to developing successful investment strategies. Without them, we will go from one investment to another aimlessly, looking at their performance without a realistic frame of reference and likely wasting time and money along the way. Well developed and realistic objectives will give us a solid framework for making prudent and effective decisions with a minimum of confusion and doubt. Going back to our comparison with driving, as long as we have a roadmap, it does not matter where we are because we can always find our way home.

Goals and Needs

Investment objectives are all about your specific goals and needs. Everyone has goals that need to be met based on future plans, age, income and risk profile. Some common goals are retirement income, children's' college costs and leisure activity like a vacation or cruise. Where we will differ from others in putting our plans to meet these goals into action is our individual risk profile, resources and time horizon among other possible special needs.

Risk profile

Our tolerance for risk is a very personal thing and while there may be many reasons for our individual risk-taking attitudes, we need to make sure right at the start that we are not making judgments based on flawed assumptions. Most average investors have a very nebulous and fuzzy understanding about risk which is closely tied to the expected return of our investments. It is therefore very important to understand the real natures of risk and return--a fundamental building block in any investment strategy. In general, the willingness to take higher risks will result in higher returns but one has to make sure they are comfortable with and can afford the short-term fluctuations in the value of their investments if they want higher returns.

Income and assets

The predictability and level of our income has a major impact on our objectives as you can imagine. If our income is stable, we can withstand more fluctuation and volatility in the sort term for example. Another issue that will impact your objectives is whether you are covered by a pension plan, a 401(k) plan or stock purchase plan at work. Yet another issue is our tax situation. If we are in a high tax bracket, we may want to minimize the taxable portion of our portfolio. The nature of other assets we may hold outside of our investments will also have an impact. For example, if our home or other real estate holdings are substantial, it makes sense to minimize our holdings in real estate within our investment portfolio. If a large pare of our wealth is tied up in illiquid assets, then our investments should probably balance that with more liquidity.

Time horizon

A critical issue in our investment planning is how much time we have to grow our investments before we need to start liquidating them. Examples would be our kids' college tuition--we know exactly how much will be need and when, which will dictate what needs to be done. Another example of time horizon would be our current age and the age at which we plan to retire. Do we have the time to ride out bull and bear market cycles? All of these issues will impact what level of risk we can take to meet our financial needs.

In most cases, it is very helpful to have an experienced and qualified financial advisor guiding you. She will not only point out traps and pitfalls that you can't see but also keep you from wavering due to a misreading of your situation or from fear that can cause you to make mistakes. In this regard, one of the most important and simple things you can do is to put your objectives in writing and formally commit to them. This is where your advisor will really come in handy by providing an unbiased outside perspective along with encouragement to stick to the plan. In mutual fund investing and investment planning in general, these are just some of the major issues we need to establish before we proceed to set our investment objectives.