In the investment management industry, it is normally mandated that advisers know their clients.
Part of this process involves gathering information about the investor’s experience, financial background (i.e.net worth and annual income) and investment objectives.
Most people confuse saving objectives with investing objectives. When it comes to saving, an investor must identify shortterm goals such as summer vacation or home repair, and long-term goals such as marriage and family, buying a home, funding college for children or retirement needs. However, investing objectives involve designing an investment plan according to our financial (saving) goals. For example, if you are in your 30s and have an objective of saving for children’s college, your priority would probably be growth.
Most textbooks divide key objectives into three types:
|1. SafetySuitable for retired individuals and near retiring individuals, especially those without a steady income.This objective prioritizes the preservation of capital by avoiding high-risk investments and favoring safety -albeit low returnof the invested capital.||2. IncomeSuitable for those who will need the money in less than five years.They allocate the portfolio towards more conservative, income-producing securities such as high-dividend stocks or short-term bonds.||3. GrowthSuitable for investors with a time frame of more than 10 years who would then take a higher degree of risk by investing more aggressively in growth-oriented stocks.|
Once identified, based on life goals and needs, these objectives are usually incorporated into an investment strategy, which is a road map to how your money is invested in practical terms. Most investors will aim for more than one of these objectives at some point in their lives.
For example, you may plan to buy a new house in three years to invest for your children’s college education in 15 years, or to fund your retirement in 30 years. Tax minimization and liquidity are other objectives referred to as secondary objectives. Most governments impose income taxation. However, there are certain investment strategies that help minimize the size and impact of taxation on the overall value of the portfolio.
Finally, liquidity refers to the ability to obtain cash as soon as needed and it can be very critical to certain investors with carefully drafted financial plans and short-term goals.