Investment Goals and Investment Strategy
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Investment Goals and Investment Strategy
Ready to start investing? How will you choose from among the thousands of investment opportunities available? The best first step is to decide what kinds of benefits you want your investments to provide. Once you’ve set goals for how you want your investments to perform, you can assess the features of various investments to determine whether they meet your needs.
Things To Know
- Before investing, determine what it is you want out of your investments.
- Investors use many different goals to guide them; they often combine them, too.
Here are some basic investment goals. It is important to remember that these goals aren’t mutually exclusive; you may put together an investment portfolio that combines a number of these benefits.
Growth and income
Investments can make money for you in two basic ways. They may pay you regular income in the form of interest payments or dividends. They may also grow in value, permitting you to sell them for more than you paid for them. Attempting to maximize the income from investments is an income strategy. Trying to maximize the growth in value, or capital appreciation, of investments is called a growth strategy.
Some investments offer only one benefit or the other. Bonds, for instance, provide interest income but don’t typically grow in underlying value. Some stocks pay no dividend income; their companies reinvest their earnings for future growth. Other stocks provide both income and growth potential. It is possible to blend both growth and income goals in one portfolio.
Inflation protection
Even in good economic times, inflation rolls on, eating away the value of assets. One investment goal is to look for investments that are likely to outperform the inflation rate. Of course, the higher the potential rate of return, the more risky the particular investment is apt to be.
Liquidity
Liquidity refers to how easy it is to convert an investment into cash, or to withdraw funds from it, usually with little or no loss in value. Generally speaking, the more liquid and stable an investment, the lower its rate of return. If you cannot afford to do without the use of your principal, your portfolio may need to trade rate of return for greater liquidity.
Preservation of principal
It is possible for an investment to be very liquid, yet subject to market value decline. A good example of this is a stock mutual fund. When your desire is to maintain the original value of your investment with little or no risk of loss, you then have a goal of preservation of principal.
Loan security
Even if you won’t need to spend your principal, you may need it to use as collateral, i.e., security for a loan. Some investments can be used as collateral, and some—options and futures, for instance—cannot.
Since your investment goals will determine the objectives of the investments in your portfolio, it pays to think carefully about exactly what you want your investments to achieve.
