A personal finance blog dedicated discussing such topics as budgeting, asset allocation, 401K, IRA, cash flow, insurance, financial planning, portfolio management, and other areas in personal finance.


Wednesday, June 22, 2005

The Importance of Understanding Your Objectives When Investing

Yesterday, when I wrote the post about life insurance, I referred to a book by G. Victor Hallman and Jerry S. Rosenbloom called Personal Financial Planning. I recommend this book as a great reference book for personal financial planning. It is not a read-it-from-cover-to-cover book. But, there are some pretty good gems of advice. One of those gems is about understanding your investment objectives before you design your asset allocation strategy.

The authors make a very good point that making investment decisions without defining your objectives is like trying to steer a ship without a rudder. They claim that investment objectives are shaped by:

  • A person's overall financial position

  • Investment constraints

  • Many other personal factors

Your objectives will change over time. Therefore, your investment policy should change too.

Here's a list of common investor objectives:

  • Maximum Current Income

  • Usually, retirees have this objective. They focus primarily on yeild.

  • Preservation of Capital

  • This is the objective of people who do not want to lose any principal. This is usually a very rigorous investment policy.

  • Reasonable Current Income with Moderate Capital Growth

  • This is often a retiree's objective too. It is a less-stringent form of the first objective. People with this objective want their capital to grow to meet future needs, but also desire current income now.

  • Long-Term Capital Growth

  • This is the typical objective of someone during their working years.

  • Aggressive Capital Growth

  • This also is typically the objective of a person during their working years. Unfortunately, it is also the objective of someone who is getting close to retirement and is trying to make up for lost time.

  • Tax-Advantaged Investments

  • The objective here is to invest in a way as to decrease the amount of taxes from investments.

Those are the most common investor objectives. Some investors might even have more than one objective. Regardless, by knowing your objective and investing accordingly, you will most likely have greater piece of mind in your investing adventures.

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