What Is an Investment Objective?
An investment objective is used by asset managers to determine the optimal portfolio mix for a client. Investments are chosen using the guidelines of the investment objective.
An investor questionnaire often defines financial goals and objectives and determines the asset allocation within the portfolio based on an individual's time horizon, risk tolerance, and financial situation.
Key Takeaways
- An investment objective is a set of goals that determines an investor's financial portfolio.
- A financial advisor determines the optimal strategy for achieving the client's goals using an investment objective.
- An investor's risk tolerance and time horizon help in determining an investment objective.
Understanding an Investment Objective
Commonly based on one of four strategies that include income, growth and income, growth, or trading, an individual's investment objective clarifies investment ideas to help achieve an individual's financial goals.
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. The portfolio is tailored according to the answers provided to these questions and a strategy is defined as an investment objective.
Risk Tolerance
Risk tolerance is the degree of risk that an investor is willing to endure given the volatility in the value of an investment.
A client with a high-risk tolerance interested in growth may have a short-term aggressive portfolio, which includes stocks and trading opportunities. A moderate-risk investor may have a balanced portfolio of growth and income instruments that may include stocks and bonds. A conservative investor with low-risk tolerance may focus on an income-generating portfolio using dividends and bonds.
What Factors Influence an Individual's Investment Objective?
In addition to an individual’s time horizon and risk profile, other factors that influence an individual’s investment decisions include income, capital gains tax, dividends tax, commission and fees for actively managed portfolios, and total wealth, which may include assets like Social Security benefits, expected inheritance, and pension value.
Where Can an Investor Find an Investment Objective Questionnaire?
Investors can find various free questionnaires online at brokerage sites. However, when choosing not to use a personal advisor, it is important to review the questionnaire's assumptions and limitations and accept the firm's terms and conditions. An investment objective will typically not be formally completed until a client has decided to use the services of the financial planner or advisor since the information that will be provided is highly sensitive.
Can an Investment Objective Change?
As financial circ*mstances or goals change, it may be helpful for an investor to complete an investment objective questionnaire again and reallocate the investments in a portfolio.
FAQs
An investment objective is a set of goals that determines an investor's financial portfolio. A financial advisor determines the optimal strategy for achieving the client's goals using an investment objective. An investor's risk tolerance and time horizon help in determining an investment objective.
What is the definition of an 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. Minimize Income Tax Burden.
What does building an investment portfolio mean? ›
A portfolio investment may be either strategic—where you buy financial assets with the intention of holding onto those assets for a long time; or tactical—where you actively buy and sell the asset hoping to achieve short-term gains.
Why setting an investment objectives is important? ›
Setting investment goals helps you define your financial objectives and what you want to achieve with your investments. It helps you determine the amount of money you need to invest and how long you'll need to invest to reach your objectives. Having clear goals will help you stay focused and on track.
What is portfolio construction and its objectives? ›
Portfolio construction is simply selecting a 'basket' of investments – selected from available investment types such as cash, fixed interest, property, equities (shares) and even alternative investments – that take into account the investor's objectives over the short, medium and/or long term.
What is an example of an investment objective? ›
Investment Objective Explained
For example, securing a secondary source of income, holding an asset long-term, ensuring financial safety, etc., can be the primary objective of investing. Secondary objectives rank lower in priority; they add to the primary objective.
What are the 2 types of investment objectives? ›
Types of investment objectives
Capital appreciation refers to the goal of growing the value of one's investment portfolio. Income generation refers to the goal of generating regular income from investments.
What is an example of a portfolio investment? ›
An investment portfolio or a financial portfolio is a basket of financial assets that may include stocks, bonds, money market instruments, cash and cash equivalents, commodities, etc.
How do you build an investment portfolio? ›
6 Steps to Building Your Portfolio
- Step 1: Establish Your Investment Profile. No two people are exactly alike. ...
- Step 2: Allocate Assets. ...
- Step 3: Decide how to diversify. ...
- Step 4: Select investments. ...
- Step 5: Consider Taxes. ...
- Step 6: Monitor your portfolio.
Introduction. Portfolio construction is a process of selecting securities optimally by taking minimum risk to achieve maximum returns. The portfolio consists of various securities such as bonds, stocks, and money market instruments.
Step by step: Setting investment goals
- Goals: Consider your reasons for investing. ...
- Risk: Consider how much you're willing to risk. ...
- Timescale: Decide how long you want to invest for. ...
- Strategy: Make an investment plan. ...
- Mix it up: Build a diversified portfolio.
The fund manager trades investments on behalf of the fund owners that adhere to the stated investment objectives.
Which of the following is not an investment objective? ›
Volatility is not a basic investment objective because stabil…
What are the three main objectives of portfolio management? ›
Objectives of Portfolio Management
- Stable Return Rate.
- Higher Marketability.
- Tax Planning.
- Active Portfolio Management.
- Passive Portfolio Management.
- Discretionary Portfolio management services.
- Non-Discretionary Portfolio management.
- Identify Your Goals and Investment Strategy.
Constructing a private markets portfolio challenges investors to make active management decisions on asset allocation, diversification, investment pacing, and exposure management, which can have a meaningful impact on portfolio risk and return.
What is the main objective for measuring the performance of a portfolio? ›
Performance measurement provides an overall indication of the portfolio's performance. Performance attribution builds on performance measurement to explain how the performance was achieved. Performance appraisal leverages both returns and attribution to infer the quality of the investment process.
What is an investment objective quizlet? ›
What is an investment objective? A financial goals used to determine whether investments are appropriate.
What is the investment return objective? ›
An investment objective is the desired investment return of an investment option. Every option has an objective. Objectives vary depending on the investment mix and level of risk of the option.
