When it comes to investing, it’s easy to question whether you’re making the “right” choices. But having concrete motivation behind your decisions can make choosing the best investing strategy a whole lot easier — that’s where defining your investment objectives comes in.
Read more: Which investment accounts are right for you?
What are investment objectives?
Your investment objectives are essentially the goals you’re trying to achieve through investing. Think about what you’d like to accomplish with your portfolio. Some common objectives include accumulating retirement funds, setting aside enough for a down payment or generating passive income.
Once you know your investment objectives — your goals with investing — you can better understand your time horizon and risk appetite (more on those in a minute) to help you develop the right investment strategy.
Note: If you’re considering an Ally Invest Robo Portfolio, the account opening process starts with a few questions about your investment goals, so knowing them in advance will help the process go more smoothly.
Knowing your objectives — plus, your time horizon and risk appetite — helps you develop the right investment strategy.
Types of investment strategies
Consider these common investment strategies as you map out how you’ll pursue your objectives. Note that none of these guarantee returns, as all investments incur risk of loss.
Capital appreciation: Buying assets that you expect to rise in price to increase the potential value of your investment
Income generation: Creating a steady, recurring stream of income, through dividends, for instance, while also preserving your initial investment
Capital preservation: Seeking to protect your initial investment value and prioritize minimizing risk of loss over maximizing high returns
Balanced growth and income: Prioritizing regular earning while increasing the principal investment over time
Speculation: Aiming for high, rapid returns, often over a short period of time and typically by taking on substantial risk of losing your invested funds or more
Factors to consider when setting investment objectives
As you decide on your investment objectives, keep these four factors in mind.
1. Primary objective
Your primary objective is your overarching investment purpose. For example, you may identify a specific goal, such as retirement, or you might have a more general goal, such as pursuing wealth for future generations.
It's okay to have multiple goals — most investors do. You can tackle those in different ways, for instance, by grouping them based on similar time horizons or separating them into different accounts. Just make sure you have a strong sense of what you're investing toward.
2. Time horizon
Consider your time horizon. When do you think you'll need the money you've invested? For example, you may decide you want to retire early. If that’s 20 years away, you might choose different types of investment products than if that’s, say, five years away.
Consider bucketing your investment goals by time horizon. For example, one set of securities may target short-term goals — some investors might consider more conservative investments here, since they’ll need the funds sooner. A second set may contain investments focusing on long-term growth, where an investor might be willing to take on more risk. A third set may contain income-oriented investments with tax benefits built in, such as those in a Roth IRA.
The better you can articulate your time horizon, the more you or a financial advisor can target the right strategy for your needs.
Read more: Robo advisor vs. financial advisor
3. Risk tolerance
Your personal preferences can drive your risk tolerance level, and so can your timelines for your various investing goals. Aggressive investors may risk more money to go for potentially better returns. In contrast, a conservative investor might opt for investments with a greater safety net, such as bonds or exchange-traded funds (ETFs). However, it's important to remember that all investing incurs a risk of loss, and there’s no way to truly know what an asset will do.
4. Assets
Consider your objectives, time horizon and risk tolerance to help you identify the best assets for your portfolio.
A few examples of investment assets are stocks, bonds, mutual funds, ETFs and retirement accounts, such as 401(k)s and IRAs. Before you invest in them, it's important to familiarize yourself with each and how they might contribute toward your goals.
How to choose the right investment objectives
Identifying a goal as an investor gets you in touch with what you'd like to accomplish. It might work to sit down and write out as many goals as you can think of, from investing for a child’s education to supporting your parents in their old age. Only by doing that can you determine your next steps.
The importance of reviewing your investment objectives regularly
A regular review of your investment objectives helps confirm that your portfolio’s performance and investment strategy are still sufficient for pursuing your goals. Consistently checking in allows you to be proactive in your adjustments, rather than reactive and impulsive.
Turn objectives into confidence
Understanding your investment objectives can help you build a strategy to work toward your larger financial goals. Whether those are growth, stability, income or a mix of all three, taking the time to set your objectives can give you confidence in your choices.
