Trying to choose the right investments? Before you select any assets to invest in, start by finding your investment objective. Your objective defines the reason you are investing. This, in turn, helps you decide which types of investments are the right ones to help you reach your goals.
- Your investment objective, or your reasons for investing, is a key part of your financial plan.
- Your objective should guide what types of assets you add to your portfolio.
- You might want to see the best possible tax results, minimize your risk as much as possible, or focus on a target-date goal, such as retirement.
- There are three types of investment objectives: growth, growth and income, or income.
What Is an Investment Objective?
An investment objective is the role that an investment, or several investments, plays to help you reach your financial goals. Once you know your objective, it can guide you toward certain asset classes or securities. These help you build a portfolio that will reach your goals.
An investment objective can also be used by someone running a mutual fund. This is a way to define how a fund will invest its portfolio. For mutual funds, an investment objective tells you what that the fund's goals are and what type of assets it will hold. This can be found in the fund's prospectus.
What Are the Types of Investment Objectives?
There are three main types of investment objectives: growth, income, or growth and income.
Do you have a goal that is at least 10 years away? Are you willing to take risks when you invest? Then a growth objective might be right for you. This gives you plenty of options to invest in. You can look at stocks, stock mutual funds, or stock exchange-traded funds (ETFs).
There are other objectives that are types of growth. These include aggressive growth, trading, or speculation.
Are you interested in making an income when you invest? Look at investments such as dividend stocks or bonds. You can also choose mutual funds or ETFs that invest in these types of securities. You can also pick a combination of income securities.
Growth and Income
You might want a combination of long-term growth and income. This could look like an account that grows in value over time and also pays dividends. This would provide ongoing growth along with regular income every month or quarter.
If that's the case, you should build a diverse portfolio of investments. You may want to hold individual stocks or bonds. You may decide to go with a variety of mutual funds. You can also choose hybrid funds that invest in both dividend stocks and bonds.
Other Investment Objectives
You can also have more than one investment objective. Your main goal could be growth or income. But along with that, you might also care about lowering your tax bill or avoiding risk.
You might want to invest in assets that come with lower taxes. This means less of your gains are lost to taxes, which can increase the return on your investment.
One of the best ways to lower your tax bill is to open an individual retirement account (IRA) or 401(k). These types of accounts are tax-advantaged. The money you invest in them will often be taxed at a lower rate than income from other investments.
Are you a conservative investor? Or maybe you have retired from work? In that case, you might not be interested in growing your portfolio a lot. You might care more about having less risk so that you know you won't lose money. This is often known as "preservation."
You can invest to maintain the value of your account, or grow it just enough to keep up with inflation. This is often around 3.0% or 3.5%. This means you will want to invest mostly in bonds, with a small number of stocks for growth.
How Do You Find Your Investment Objective?
Before you begin to build a portfolio, start by asking a few questions:
- 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 see returns that are above average?
- Do you want your money to grow?
- Do you want to preserve its current value?
The answers you come up with will help you find your investment time horizon and risk tolerance. These are the bases of your investment objective.
For example, the purpose of your money might be for retirement. You know that you have at least 20 years until this goal can be reached. This means you are a long-term investor. You have time to take some risks. In this case, a growth objective may be right for you.
The typical long-term investor will have a growth objective. But your risk tolerance will help you decide whether growth stocks or growth funds are the right way to invest your money.
The Bottom Line
Before choosing investment types, start with your investment objective. This will help you decide on the right way to invest your money. Every investor's needs are unique to their time horizon and tolerance for risk. These are the primary factors to think about when setting your investment objective.