Setting Investment Goals Most investors have a basic goal of earning the highest rate of return they can, consistent with their overall objectives and the investment limitations under which they must function. Your investment objectives often change over the passage of time. For most of your life, you may have been concerned with capital accumulation. A family may start out needing capital for emergencies or to provide college education for children. Later in life, retirement savings may become the major reason to accumulate capital. Establishing a general investment fund is a common goal for people who are seeking financial security and personal financial freedom. How large an investment fund can you hope to establish? That depends on the amount of capital you have to start with, how much you can save every year and the success of the investment choices made by you and your advisers. It helps to have specific goals and objectives. You can start by estimating the amount of capital you will need at various stages in your life. Look next at the amounts you will have available for investment purposes, how much you can reasonably expect to save each year and the number of years remaining to meet your investment objectives. Finally, consider the types of investments you are comfortable with based on the risk factors. Remember that earning a high rate of return often means sacrificing security of principal or income. Here are the kinds of risk you must consider in your investment planning: • Financial Risk is the danger that the issuers of investments may default on expected payments or rates of return. • Market Risk is the hazard that a particular security, industrial group or entire securities market may undergo price fluctuations because of a “bear market” or because the investor’s timing of purchases is poor. • Interest Rate Risk arises from fluctuations in interest rates that may drive down the value of bonds you own that pay relatively low rates compared to current interest levels. • Purchasing Power Risk stems from inflation, which, while tame in recent years, should always be a factor to consider. Fixed-dollar assets lose purchasing power when inflation is rampant but they may gain in value during a deflationary period. |
