How to Determine Your Investment Objectives

Investment Objective Definition and Use In Financial Planning

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Before you choose the right investments for yourself and your financial goals, it's important to properly identify and define your investment objective. The objective outlines the fundamental reason you are investing, which in turn helps you determine which types of investments are appropriate to reach your financial goals.

Key Takeaways

  • Your investment objective is a critical part of your financial plan. It’s your reason for investing in the first place.
  • Your investment objective should guide each of your investment choices. It should dictate what types of assets you add to your portfolio.
  • Your objective might be to achieve the best possible result tax-wise, and you might want to minimize your risk as much as possible.
  • Investment objectives fall into three categories: growth, growth and income, or income.

What Is an Investment Objective?

An investment objective is the purpose that a particular investment or combination of investments serve for the investor's financial goals. Once the objective is determined, it will dictate what particular asset classes and investment security types the investor should buy and hold to fulfill the purpose of the portfolio.

An investment objective can also define how a mutual fund invests its portfolio. For example, with regard to mutual funds, the stated investment objective indicates a particular fund’s investment goals, based on the wording in a fund's prospectus.

What Are the Different Types of Investment Objective?

There are three primary types of investment objectives, including growth, income, and growth and income.

Growth: If the investor has a long-term (at least 10-year) time horizon and a high tolerance for market risk, a growth objective would be appropriate. Suitable investments might include stocks, stock mutual funds, or stock exchange-traded funds (ETFs). Related objectives may include aggressive growth, trading, or speculation.

Income: If an investor seeks income, the appropriate investments may include dividend stocks, bonds, or mutual funds or ETFs that invest in these securities or a combination of income securities.

Growth and Income: If an investor is seeking a combination of long-term growth and income, they may build a portfolio of investments or choose hybrid funds that invest in both dividend stocks and bonds. For example, some investors want to grow their account value over time, but they also want to take some income from their investments.

Other Investment Objectives

There are other objectives that can supplement or complement your primary objective. These additional objectives may include minimizing your taxes or preservation:

Tax efficiency: An investor may seek investments that have a lower tax hit as another way to increase the return on the investment. You can do that by contributing to an individual retirement account (IRA) or 401(k).

Preservation: Conservative investors or retired investors might not want to grow their investment assets but rather keep risk to a minimum and either maintain value or grow the value just enough to keep up with inflation. Preservation objectives usually seek to keep account values stable or, at a minimum, grow at a rate equal to the expected rate of inflation, which is usually around 3.0% to 3.5% for investing purposes.

Determining Your Investment Objective

Your investment objective is the answer to the basic questions that you are smart to ask before you begin building a portfolio: What is the purpose of your money? What do you want it to do? How much time do you have until you will need this money? How much risk are you willing to take to achieve above-average returns? Do you want your money to grow, or do you want to preserve its current value?

The answers to these questions will help you arrive at your investment time horizon and risk tolerance, which are the fundamental elements of determining your investment objective. For example, if the purpose of your money is for retirement, and you estimate that you have at least 20 years until this investment goal can be reached, you are a long-term investor, and a growth objective may be appropriate.

The typical long-term investor will have a growth investment objective. However, the investor's risk tolerance will confirm whether or not growth stocks or growth funds are the appropriate investment securities to buy and hold.

The Bottom Line

Before choosing investment types, be sure to properly identify your investment objective, which will then help you determine which investment types are appropriate for you. Every investor's needs are unique to their time horizon and tolerance for risk, which are the primary determining factors of investment objective.

The Balance does not provide tax, investment, or financial services or advice. The information is being presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. Investing involves risk, including the possible loss of principal.