Four Investment Objectives
In broad terms, four main investment objectives cover how you accomplish most financial goals.
These investment objectives are important because certain products and strategies work for one objective, but may produce poor results for another objective.
It is quite likely you will use several of these investment objectives simultaneously to accomplish different objectives without any conflict.
Let’s examine these objectives and see how they differ.
Capital appreciation is concerned with long-term growth. This strategy is most familiar in retirement plans where investments work for many years inside a qualified plan.
However, investing for capital appreciation is not limited to qualified retirement accounts. If this is your objective, you are planning to hold the stocks for many years.
You are content to let them grow within your portfolio, reinvesting dividends to purchase more shares. A typical strategy employs making regular purchases.
You are not very concerned with day-to-day fluctuations, but keep a close eye on the fundamentals of the company for changes that could affect long-term growth.
If your objective is current income, you are most likely interested in stocks that pay a consistent and high dividend. You may also include some top-quality real estate investment trusts (REITs) and highly-rated bonds.
All of these products produce current income on a regular basis.
Many people who pursue a strategy of current income are retired and use the income for living expenses. Other people take advantage of a lump sum of capital to create an income stream that never touches the principal, yet provides cash for certain current needs (college, for example).
Capital preservation is a strategy you often associate with elderly people who want to make sure they don’t outlive their money.
Retired on nearly retired people often use this strategy to hold on the detention has.
For this investor, safety is extremely important – even to the extent of giving up return for security.
The logic for this safety is clear. If they lose their money through foolish investment and are retired, it is unlike they will get a chance to replace it.
Investors who use capital preservation tend to invest in bank CDs, U.S. Treasury issues, savings accounts.
The speculator is not a true investor, but a trader who enjoys jumping into and out of stocks as if they were bad shoes.
Speculators or traders are interested in quick profits and used advanced trading techniques like shorting stocks, trading on the margin, options, and other special equipment.
They have no love for the companies they trade and, in fact, may not know much about them at all other than the stock is volatile and ripe for a quick profit.
Speculators keep their eyes open for a quick profit situation and hope to trade in and out without much thought about the underlying companies.
Many people try speculating in the stock market with the misguided goal of getting rich. It doesn’t work that way.
If you want to try your hand, make sure you are using money you can afford to lose. It’s easy to get addicted, so make sure you understand the real possibilities of losing your investment.
Your investment style should match your financial objectives. If it doesn’t, you should see professional help in dealing with investment choices that match your financial objectives.