Determining your investment objectives

Investing

As investors, it is important to determine and clearly state your investment goals and objectives. Before undertaking an investment, one must have a clear picture of the desired outcome. In most cases, the investment objectives can be narrowed down to three main categories. Investors may be looking to achieve one of the following:

  • Income stream or cash flow from investments
  • Capital growth
  • Capital preservation

To achieve one or more of these objectives, there are different types of investment instruments that can be used.

Income stream/cash flow

An investor may be looking to create a consistent and predictable income source to either supplement their existing income or to be their primary source of income. For persons looking to generate a stream of income from their investments, they must first determine the frequency of the required interest payments.

Depending on your cash needs, an investment portfolio may be structured to provide monthly, quarterly, semi-annual, or annual interest payments. In some cases, it is necessary to have more than one asset in the portfolio to enable the interest payments (cash flow) to match the cash needs.

For investors looking to achieve this objective, it is necessary to invest in fixed income products which have predetermined interest payments and payment dates. To create this type of portfolio, the investor should look at investing in global bonds, preference shares and corporate notes. When investing in any of these asset classes, the interest payment amounts, and interest payment dates are known.

If it is determined that the investor requires a quarterly interest payment to meet their objectives, then one bond with quarterly interest payments may suffice. However, if the investor does not find a suitable bond with quarterly payments then a portfolio can be constructed using 2 bonds, each with semi-annual interest payments. Once the semi-annual payment dates are different for both bonds, then a quarterly income stream can be created. Different assets can be used to create the desired income stream.

Capital growth

For the investor looking to grow the value of their investments over time, it is important to invest in assets that will provide the best growth rate while matching their risk tolerance. Always remember the risk/reward tradeoff concept that states the higher possible reward is often associated with higher risk. Be sure that your risk appetite is clearly defined, and that you are investing in assets that meet your risk tolerance. It is easy to go for the highest returns but understand the inherent risk being undertaken before making the investment.

To achieve capital growth, the investor may look at investing in bonds, stocks, or mutual funds. For buying bonds and stocks to achieve this objective, the investor should look for undervalued assets with upside potential. Buy low, sell high. To maximize the growth of the investment, it is important to constantly monitor and actively manage your portfolio. This will help to capitalize on gains and minimize losses. Interest payments from the bonds and dividends from stocks should also be reinvested to achieve a compounding effect.

For persons who do not wish to monitor a portfolio, or want their portfolio to be professionally managed, a Mutual fund may be a better option for achieving capital growth. Mutual Funds pool the investments of individual investors to purchase assets that are managed as a single portfolio. The fund manager will monitor and adjust the portfolio as needed to maximize growth. As with all investments, the investor should understand the fund being invested in to determine if it matches their risk appetite.

Capital preservation

A conservative investor is one who will seek capital preservation. The aim of capital preservation is to preserve the initial investment and avoid loss of value. This objective is usually achieved by investing in lower yielding or “safe” assets. These assets can include Treasury Bills, Certificates of Deposit, Investment grade bonds and repurchase agreements. The investor who is seeking capital preservation is not concerned about high interest rates. The concern is how to preserve the initial investment for future use.

Persons seeking capital preservation need to be aware that they will need to earn from their investment as the initial value will be affected by economic inflation. Therefore, for true capital preservation, the funds should be invested at a rate at least equal to the rate of inflation.

Takeaway

Depending on the goal of the investment, an investor may choose one or more of the investment objectives outlined. Whether it is capital preservation, capital growth or income, the investor must understand how different asset types can help to achieve the goals. They must also determine the level of risk with which they are comfortable before making an investment. If the objective, assets, and risk appetite align, the investor is ideally positioned to achieving their goals.

Always seek guidance from a licensed investment advisor!!!

Dwayne Neil, MBA, is the AVP, Personal Financial Planning at Sterling Asset Management. Sterling provides financial advice and instruments in U.S. dollars and other hard currencies to the corporate, individual and institutional investor. Visit our website at www.sterling.com.jm Feedback: if you wish to have Sterling address your investment questions in upcoming articles, e-mail us at [email protected]

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