Setting Your Investment Objectives and Expectations

Setting Your Investment Objectives and Expectations

Setting your investment objective(s) and expectations is probably first thing an investor should think about before investing. Knowing why you’re investing is the easy part, however getting there requires a bit more planning. Thus, whether you’re saving for retirement, buying a home, or setting aside money for the children’s college tuition, laying out a financial plan is the first step.

As a general rule the younger you are, and the longer the expected investment holding period, the more aggressive your investment product mix can be. Younger investors typically invest a greater percentage of their investment dollars in equities, whereas middle‐age and older investors tend to invest in a portion or both equities and bonds, or all bonds.

Once the financial plan is created, investors need to think expectation. Of course every investor’s idea of expectations is they want to make as much money as possible while taking little, to any risk. Sounds great doesn’t it? The only problem it’s completely unrealistic.

According to countless industry statistics, on average (since 1926) equities have provided a return of close to 9% per year, while long term government bonds have average closer to 5% per year. Using that long term history as a benchmark, can help investor set realistic expectations.

Now that your thinking about investing let’s get more specific on what you need to think about.

Objectives, Goals and Expectations

When entering an investment you should have some goals in mind. What are your objectives for the money you will be investing? Are you trying to accumulate money for a longer‐term goal such as a college education for your kids or perhaps a comfortable retirement for yourself?

You might even have several goals and each of those goals may deploy different investment plans to be achieved. The point is here is before you decide to invest your hard earned money it is important to understand why you are investing and what your end game is.

With your goals in place you then need to know how much risk you can tolerate. Though we mentioned that over the long term equities and bonds have average positive returns it’s never a smooth ride. Along the way there will inevitably be periods of large gains, as well as large losses, and while the former are celebrated, the latter can be frightening, even to the most seasoned investor.

Risk Tolerance

Risk tolerance as the title suggests is pretty straight forward, what is your pain threshold when it comes to the potential of losing the money you invested. For some, seeing the principle they invested drop 5% in value can send then running to the medicine cabinet, whereas other investors can see their investment drop 10 or 20% and not bat an eyelash. Neither is right or wrong, it’s just a personal preference. Stated another way, investors should have investments and a tolerance for risk commensurate with what allows them to sleep comfortably at night.

Your risk tolerance depends on a variety of factors such as; when do you need the money you’re investing, how old you are, how much income do you earn, and whether you have dependents or not.

Stay Educated

Over the years we are always amazed that people will spend days, weeks and in some cases months educating themselves on the make, model and features of a washing machine, yet spend very little, to no time educating themselves before plunking down $100,000 into an investment.

Nowadays financial information is so easily accessible, thus there is no reason to not educate oneself on the various products offered, services rendered and charges incurred.

We have already shed some light on the fact that most, if not all professional money managers consistently fail to be the S&P 500 Index over the long haul. That said, the cost you are charged for your investments should be one of the main determining factors in your investment choice, not the pretty brochure or the fancy office an advisor resides in.

In parting we suggest investors have a plan, set realistic expectations and don’t overpay for performance that academic study after academic study show can’t be repeated consistently.

This material is intended presented for educational purposes only and should not be used or relied upon to make investment decisions. Any references to returns are not to be relied upon as past returns may not be an indication of future returns.

Investors should carefully consider their personal investment objectives, risks, charges and expenses. Investing can result in the loss of some, or all of your principal, please consult a financial professional before investing.

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