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 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.
What is the definition of investment and its objectives? ›
Investment is the process of investing your money in an asset with the objective to grow your money in a stipulated time period.
What is an investment objective in Quizlet? ›
What is an investment objective? A financial goals used to determine whether investments are appropriate.
How do you use investment objective in a sentence? ›
The fund manager trades investments on behalf of the fund owners that adhere to the stated investment objectives.
What is portfolio management and its objectives? ›
Primarily, portfolio management serves as a SWOT analysis of different investment avenues with investors' goals against their risk appetite. In turn, it helps to generate substantial earnings and protect such earnings against risks.
What is the simple definition of investment? ›
An investment is a plan to put money to work today to obtain a greater amount of money in the future. It is also the primary way people save for major purchases or retirement. With stocks, bonds, real estate, or commodities, individuals can create a diversified portfolio.
What is a short term investment objective? ›
Short-term investments are typically bought and held for a shorter period of time — generally three years or less. They are typically suitable for needs or goals that are more immediate or in the near future — for example, saving for the purchase of a vehicle.
What is an investment objective closely related to? ›
An investment objective is related to personal financial planning and serves as a specific portfolio for the individual.
What is the main objective of an investment policy? ›
It provides guidance for informed decision-making and serves as both a roadmap to successful investing and a bulwark against potential mistakes or misdeeds. An IPS lists the investor's investment objectives, along with their time horizon.
What are investment objectives? Different types of investment instruments are created to cater to goals like safety, liquidity, capital gains, etc. These also reflect the objectives of investment of an investor. For instance, you invest in stocks to yield gains over time, i.e., capital gains.
Why it is important to know the objective of investments? ›
Identifying your objective of investment management can provide direction toward specific securities or asset classes. Generally, objectives are determined based on risk and return. The amount of risk you are comfortable taking will determine your returns.
What is your investment goal? ›
To be true to the term, investing must start with a specific goal corresponding to a set time horizon. The goal itself could be anything: buying a new car in two years; purchasing your first home in five years; or retiring in 40 years. What's most important is to have the goal be the focus of your approach.
What are return objectives of an investment example? ›
3.1 Return Objectives
For example, a client wants to achieve a return of 9% or inflation-adjusted (real) return of 2%. The objective is to deliver a positive return over time, irrespective of how good or bad the market performance is. No index or benchmark is used to measure the performance.
What is the objective of return on investment? ›
Return on investment (ROI) is a performance measure used to evaluate the efficiency or profitability of an investment or compare the efficiency of a number of different investments.
What would be your primary objective as an investor in a company? ›
The main goal of investors is to make money. This, in more specific terms, means that they want to maximize the returns of the company they invested in as their primary objective. To maximize returns, investors also aim to ensure the growth and safety of the company.
