Investment Objectives

One of the most frustrating and difficult tasks that an investment adviser must often overcome is that investors/ clients often do not clearly understand their investment objectives and goals. These objectives might be speculative, aggressive growth, growth, balanced, or income. They may also fall into a variety of goals such as: child’s education; retirement; saving for a home; etc. Advisers should be certain that a client fully understands what he wants to accomplish before discussing investment alternatives, because what may be fabulous for one individual could be wholly inappropriate for another.

One of the most commonly misunderstood concepts by many investors is the idea of rate of return. This concept might properly refer to the interest or dividend received on a particular investment. In other words, if someone invests ten thousand dollars ($10,000) and receives five hundred dollars ($500) per year in dividends, the rate of return is five percent (5%). Many people, particularly those invested in Mutual Funds, have a tendency to also add in any Capital Gains received, but since capital gains on a mutual fund, by definition, are returns of capital, these capital gains do not increase one’s rate of return. For example, if a mutual fund is priced at ten dollars ($10) per share, and it pays fifty cents (50cents) in dividends, the rate of return is five percent. The declaration of a capital gain of, for example, one dollar ($1) per share if not an additional ten percent, but rather simply adds a proportionate additional of shares, while the per share price drops by the $1 capital gains distribution.

There is another term used in investing called Total Return. This is calculating by adding a combination of any dividend declared to any appreciation in the price of the share. So, for example, if one invests ten thousand dollars ($10,000) and exactly one year later it is worth $12,500, the Total Return would be 25% for that year.

Many people who state that their objective is income often complain when their investment does not appreciate as much as others do, especially during rising markets. However, if the objective is income, then one must look at the Rate of Return, as mentioned above. There are also those that are interested in something known as Income with Preservation of Capital, which means maximizing income received while preserving as much as possible the investment corpus. Obviously, this requires a more restricted and often more conservative investment strategy, which will generally or often result in a lower rate of return than when the preservation of capital restriction is not a factor.

There are those that are looking for Growth, meaning the value of their corpus “grows” over time, and that is their primary objective. This scenario is generally best suited for individuals that have years to invest, and are looking for long term growth. There are a variety of degrees of risk in growth investments, depending upon the underlying portfolio. These range from aggressive and speculative, to more conservative and blue-chip. An investor’s ability to withstand risk and the overall investment strategy are guidelines that should be used.

These are just a few investment alternatives. My caveat to any investor is to thoroughly research any investment, know your objective and goal, don’t be greedy, have a comfort level with both the investment and the person you are investing with, and never put “all your eggs into one basket.”

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