Defining Your Basic Investing Objectives: What to Factor in (2024)

Basic Investment Objectives: An Overview

The options for investing your savings are always increasing but they can all still be categorized according to three fundamental characteristics: safety, income, and growth. The first task of any successful individual investor is to find the correct balance among these three worthy goals. The success of one can come at the expense of the others.

Key Takeaways

  • An investment can be characterized by three factors: safety, income, and capital growth.
  • Every investor has to select an appropriate mix of these three factors. One will be preeminent.
  • The appropriate mix for you will change over time as your life circ*mstances and needs change.
  • The best choice is often a mix of all three that meets your needs.

Safety

It's said that there's no such thing as an absolutely safe and secure investment but you can get pretty close. Investing in government-issued securities in stable economic systems is one. U.S.-issued bonds remain the gold standard. You have to envision the collapse of the U.S. government to worry about losing your investment in them.

AAA-rated corporate bonds are also considered safe. They're issued by large, stable companies. These securities are arguably the best means of preserving your principal while receiving a pre-set rate of interest.

The risks are similar to those of government bonds. IBM or Costco would have to go bankrupt to warrant worrying about losing money investing in their bonds.

Extremely safe investments are also found in the money market. Because of increasing risk, thesesecurities includeTreasury bills (T-bills), certificates of deposit (CDs), commercial paper, or bankers' acceptance slips.

But safety comes at a price. The returns are very modest compared to the potential returns of riskier investments. This is referred to as "opportunity risk." Those who choose the safest investments may be giving up big gains.

There's also interest rate risk to some extent. You could tie your money up in a bond that pays a 1% return then watch as inflation rises to 2%. You've just lost money in terms of real spending power. The very safest investments are short-term instruments, such as three-month and six-month CDs, for this reason. The safest investments pay the least of all in interest.

Income

Investors who focus on income may buy some of the same fixed-income assets that are described above but their priorities shift toward income. They're looking for assets that guarantee a steady income supplement and they may accept a bit more risk to get there. Income is often the priority of retirees who want to generate a stable source of monthly income while keeping up with inflation.

Government and corporate bonds may be in the mix, and an income investor may go beyond the safest AAA-rated choices and go longer than short-term CDs. The ratings are assigned by a rating agency that evaluates the financial stability of the company or government issuing the bond. Bonds that are rated at A or AA are only slightly riskier than AAA bonds but they offer a higher rate of return. BBB-rated bonds carry a medium risk but more income.

You're in junk bond territory beyond these ratings and the word "safety" doesn't apply.

Income investors may also buy preferred stock shares or common stocks that historically pay good dividends.

Capital Growth

By definition, capital growth is achieved only by selling an asset. Stocks are capital assets. Barring dividend payments, their owners have to cash them in to realize gains.

There are many other types of capital growth assets as well, from diamonds to real estate. They all share some degree of risk to the investor. Selling at less than the price you paid is referred to as a capital loss.

The stock markets offer some of the most speculative investments available because their returns are unpredictable. Blue chip stocksare generally considered to be the best of the bunch because many of them are reasonably safe. They offer modest income from dividends and the potential for capital growth over the long term.

Growth stocks are for those who can tolerate some ups and downs. These are the fast-growing young companies that may grow up to be Amazons, or they might crash spectacularly.

The dividend stars are established companies that may not grow in leaps and bounds but pay steady dividends year after year.

Profits on stocks offer the advantage of a lower tax rate if they're held for a year or more.

Many individual investors avoid stock-picking and go with one or more exchange-traded funds or mutual funds that can give them stakes in a broad selection of stocks.

One built-in bonus of stocks is a favorable tax rate. Profits from stock sales are taxed at the capital gains rate if the stocks are owned for at least a year and this is less than the income tax rates paid by most investors.

Read about Investopedia's 10 Rules of Investing by picking up a copy of our special issue print edition.

Secondary Objectives

Safety, income, and capital gains are the big three objectives of investing but there are others that should be kept in mind as well.

Tax Minimization

Some investors pursue tax minimization as a factor in their choices. A highly-paid executive may seek investments with favorable tax treatment to lessen the overall income tax burden. Contributing to an individual retirement account or any other tax-advantaged retirement plan is a highly effective tax minimization strategy.

Liquidity

Investments such as bonds or bond funds are relatively liquid. They can be converted into cash quickly in many cases and with little risk of loss. Stocks are less liquid because they can be sold easily but selling them at the wrong time can cause a serious loss.

Many other investments are illiquid. Real estate or art can be excellent investments unless you're forced to sell them at the wrong time.

When Do Treasury Bills Mature?

The maturity terms of Treasury bills (T-bills) range from four weeks to a maximum of one year. This makes them essentially short-term investments if your goal is to make some money by a time on the near horizon.

What Is a Junk Bond?

Junk bonds come with low scores from the primary raters: S&P, Moody's, and Fitch. These scores are typically less than BBB. Junk bonds are inherently risky for investors. They can be tempting because they often pay high interest but they run the risk of default so you could end up losing money despite the interest rate.

What Are the Capital Gains Tax Rates?

Capital gains tax rates are favorable if you hold an asset for at least one day more than a year. These are classified as long-term gains and most are taxed at rates of 0%, 15%, or 20%. These rates can be significantly less than your income tax bracket for the year but qualifying for each rate depends on your overall taxable income. Nonetheless, the IRS indicates that most taxpayers fall into the 15% category.

You can be liable for a capital gains tax when you sell an asset for more than you invested in it. You'll want to hold onto a profitable asset for at least one year and one day for more favorable long-term tax treatment. Otherwise, capital gains are taxed along with your other income according to your marginal tax bracket.

The Bottom Line

The answer doesn't lie in a single choice among safety, growth, or capital gains for most investors. The best choice is a mix of all three that meets your needs. And it will most likely change over time. Your appetite for capital gains may be highest when you're at the start of your career, and you can withstand a lot of risks, but you might prioritize holding onto that nest egg and dialing down the risk as you approach retirement.

Your portfolio will probably reflect one pre-eminent objective at any stage in life, with all other potential objectives carrying less weight in the overall scheme.

Defining Your Basic Investing Objectives: What to Factor in (2024)

FAQs

Defining Your Basic Investing Objectives: What to Factor in? ›

An investment can be characterized by three factors: safety, income, and capital growth. Every investor has to select an appropriate mix of these three factors. One will be preeminent. The appropriate mix for you will change over time as your life circ*mstances and needs change.

What is your investment objective answer? ›

An investment objective is a statement of what investors want to achieve. It can be short-term, such as generating income, or long-term, such as capital appreciation. Breaking down an investment objective means analyzing it to develop a plan to achieve it.

How do you determine your investment objectives? ›

The information that an individual provides to determine their investment objective may include annual income and net worth, average annual expenses, timeline to withdraw the money, and the maximum decrease in the value of the portfolio with which the investor is comfortable.

What are the factors to be considered in an investment decision? ›

Before making a new investment decision, the financial health of the company should be assessed. Financial documents such as income statements, balance sheets, and cash flow statements must be thoroughly examined to understand the company's liquidity, profitability, and debt structure.

What is my primary investment objective? ›

Your primary objective is your overarching investment purpose. For example, you may identify an exact goal, such as retirement, or you might have a more general goal, such as building wealth for future generations. It's okay to have multiple goals — most investors do.

What is your primary investment objective? ›

Following are some of the primary objectives of investment: To Keep Funds Safe & Secure. To Grow Your Funds Exponentially. To Earn a Steady & Additional Source of Income.

What is the investment objective and strategy? ›

Investment Objective: Define your goal, whether it is long-term retirement savings or funding short-term expenses. Strategies targeting wealth accumulation differ from those focusing on income. Time Horizon: How long can your capital remain invested?

What are the objectives of the investment criteria? ›

The primary objective of a developing economy is to secure a greater and faster increase in its income from its available resources. Therefore, the objectives of investment criteria are summarized below: (i) Equal distribution of income and wealth. (ii) Balanced and rapid growth of the economy.

What is the most important factor in investing? ›

A long horizon and consistency are keys to healthy investment returns. I will start off by saying there's no magic bullet. The two things that separate successful investors from losers is 1) a long horizon and 2) consistency.

What is a factor strategy in investing? ›

Factor style investing, has become prominent in recent years as investors seek to enhance portfolio returns and diversification while keeping volatility low. Factor investing is the strategy of targeting securities with specific characteristics such as value, quality, momentum, size, and minimum volatility.

What are the three factors that investors must consider when making investments? ›

Wealthy investors are known for their strategic approach to investing, considering various factors before making investment decisions. Three key aspects that often influence their investment choices include risk tolerance, portfolio diversification, and goal-based investing.

What are return objectives of an investment example? ›

Return objectives can be stated on an absolute or a relative basis. Absolute: Absolute return is the return a portfolio must achieve over a certain period of time. For example, a client wants to achieve a return of 9% or inflation-adjusted (real) return of 2%.

What is the investment objective income? ›

Investment Objective - Income:

Income investors seek a maximum amount of income given their risk tolerance, and are willing to forgo capital appreciation and growth of income. Risk Tolerance - Conservative: Conservative Income investors seek the maximum amount of income consistent with a modest degree of risk.

What is a funds investment objective? ›

The fund's objective. When a stock mutual fund defines its investment objective, it is identifying a specific type of stock—though not individual stocks—that will be the core of its portfolio. Sometimes the objective is quite broad.

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