Investment Objective:
An investment objective is a client information form used by registered
investment advisors (RIAs), robo-advisors, and other asset managers that
helps to determine the optimal portfolio mix for a client. An investment
objective may also be filled out by an individual managing their own
portfolio.
KEY TAKEAWAYS
An investment objective is a set of goals an investor has for their portfolio.
The objective helps an investment manager or advisor determine the
optimal strategy for achieving the client's goals.
The investment objective is often determined using a questionnaire.
An investor's risk tolerance and time horizon are two main parts of
determining an investment objective.
Robo-advisors can take into consideration investment objectives and build
an optimal portfolio for lower fees than traditional advisors.
Understanding Investment Objectives
An investment objective is usually in the form of a questionnaire, and answers to
the questions determine the client’s aversion to risk (risk tolerance) and how long
the money is to be invested for (time horizon). Basically, the information retrieved
from the form filled out by the individual or client sets the goal or objective for the
client’s portfolio in terms of what types of security to include in the portfolio.
Some of the questions that are included in the form to figure out this objective
include:
What's your estimated annual income and net worth?
What's your average annual expenses?
What's your goal for investing this money?
When would you like to withdraw your money?
Do you want the money to achieve substantial capital growth or are you
more interested in maintaining the principal value?
What's the maximum decrease in the value of your portfolio that you would
be comfortable with?
What's your level of knowledge with investment products such as
stocks, fixed income, mutual funds, derivatives, etc.?
An individual or client would have their portfolio tailored according to the answers
provided to these questions. For example, a client with a high-risk tolerance
whose goal is to buy a home in five years and is interested in capital growth will
have a short-term aggressive portfolio set up for them. This aggressive portfolio
would probably have more stocks and derivative instruments allocated in the
portfolio than fixed income and money market securities.
On the other hand, a 40-year-old high-income earner investing to retire in 20
years and who is only interested in preserving capital may construct a long term
portfolio with low-risk securities heavily comprised of fixed income, money
market, and any investment that would protect his capital against inflation.
Special Considerations
In addition to an individual’s time horizon and risk profile, other factors that
influence an individual’s investment decisions include:
After-tax income earned.
Investment taxes—such as capital gains tax and dividends tax.
Commissions and fees based on whether the portfolio will
be actively or passively managed.
Portfolio liquidity, which determines the ease of converting securities to
cash in case of an emergency.
Total wealth, which includes assets not included in the portfolio such
as Social Security benefits, expected inheritance, and pension value.
An investment objective will typically not be completed by a client until he or she
has decided to use the services of the financial planner or advisor since the
information that will be provided is highly sensitive. As the client’s goals change
over the years due to a major life change such as marriage, retirement, home
purchase, change in income, etc., the portfolio manager will re-evaluate the
client’s investment objectives and, if necessary, rebalance the investment
portfolio accordingly.
Investment Objectives and Robo-Advisors
With the rise of financial technology in the digital era, robo-advisors are poised to
take over the roles of human financial advisors, planners, and money managers.
Using a robo-advisor, a client can fill out the investment objective form provided
through the robo app or web platform.
Based on the filled out questionnaire, the robo-advisor would recommend an
optimal portfolio for the client for a minimal fee, compared to the higher fees
charged by traditional advisors. The investment objective form provided by a
robo-advisor is much similar to the one provided in the traditional setting.
However, the choice of going for either an automated or human advisor is up to a
client’s discretion and how comfortable they are with investment products.
four main investment objectives cover how you accomplish most
financial goals. While certain products and strategies work for one
objective, they may produce poor results for another. Most people have
long- and short-term financial planning needs, and will likely use more than
one of these strategies at the same time with no conflict. The goal is to find
the combination of the four objectives that makes sense for your financial
situation.
Capital Appreciation
Capital appreciation is concerned with long-term growth and is most common in
retirement plans where investments work for many years inside a qualified plan,
such as a 401(k) or IRA.1 However, investing for capital appreciation is not limited
to qualified retirement accounts. This objective involves holding stocks for many
years and letting them grow within your portfolio while reinvesting dividends to
purchase more shares.
Compound interest is the greatest force for those concerned with capital
appreciation. Let's imagine that you make an initial $1,000 investment and add
$100 monthly for the next 20 years. The total amount contributed during that
period would be $25,000. However, if your investments generate an 8% return
annually, compound interest will place your total savings at $59,575.31.2
Investors using the capital appreciation strategy are not concerned with day-to-
day fluctuations. However, they keep a close eye on the fundamentals of the
company for changes that could affect long-term growth. A typical strategy
involves regular purchases.
Current Income
The current income involves investing in stocks that pay a consistent and high
dividend, as well as some top-quality real estate investment trusts (REITs) and
highly-rated bonds because these products produce regular current income.
People concerned with current income should consider investing in blue-chip
stocks, which are shares in large, prominent corporations that have shown a long
history of growth and consistent dividend payouts. 3 These companies have
proven they can withstand economic downturns and still prosper, so they're
generally a safe choice.
Many people who focus on current income are retired and use the income for
living expenses. In contrast, others 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—such as college tuition.
Capital Preservation
Capital preservation is often associated with retired or nearly retired people who
want to make sure they don't outlive their money. For this investor, safety is
critical—even if it involves giving up return potential for security. The logic for this
safety is clear: A retiree who loses money through unwise investments is unlikely
to get a chance to replace it.
Younger investors can have a stock-dominated portfolio because they have
many years to recover from any losses that may occur due to market changes or
economic downturns. This isn't the case for older individuals. Investors who want
capital preservation tend to invest in bank CDs, U.S. Treasury issues, and
savings accounts because they offer modest returns but possess much less risk
than stocks.
Speculation
The speculator is not a true investor, but a trader who enjoys jumping in and out
of stocks for capital gain. Speculators or traders are interested in quick profits
and use advanced trading techniques like shorting stocks, trading on the
margin, options, and other special methods. Speculators have no real attachment
to the companies they trade, and they may not know much about the underlying
business except that the stock is volatile and ripe for a quick profit.
Many people try speculating in the stock market with the misguided goal of
getting rich, and the overwhelming majority fail at doing so. If you want to try your
hand, make sure you are using money you can afford to lose without jeopardizing
your livelihood or retirement ambitions. It's easy to get a false sense of
competence after initial success, so thoroughly understand the real possibilities
of losing your investment.
The Bottom Line
Your investment style should match your financial objectives. If it doesn't, get
professional help in dealing with investment choices that match your current life
and the one you desire. There is no one-method-fits-all approach when dealing
with financial decisions, so it's essential to have a clear understanding of your
situation to make the best choice for yourself. Likewise, it's important to adjust
your strategy as you age and near retirement.
