Investment Objectives

Perhaps the single most important question an investor can ask himself or herself is “what is my investment objective”. The answer to that question serves as the basis underpinning investment decisions and investment objectives can change over time. Let’s take a look at investment objectives for a specific individual’s 401K and over time.

To start let’s list out specific investment objectives, starting with the least risky: Income, Aggressive Income, Capital Growth, and Aggressive Capital Growth.

An individual investor enters the workforce and signs up for the firm’s 401K. Given the long time frame to retirement a list of investment objectives for an investor between 20 and 30 years of age, could be:

1. Aggressive Capital Growth

2. Capital Growth

3. Aggressive Income

4. Income

An asset allocation could be Cash 0%, Fixed Income 20-30%, and Equities 70-80%.

The investor gets older and is now 30 years old. The time frame to retirement is still fairly lengthy but the investment objectives change for an investor between 30 and 40 years of age and could be:

1. Capital Growth

2. Aggressive Capital Growth

3. Aggressive Income

4. Income

An asset allocation could be Cash 0-5%, Fixed Income 30-40%, and Equities 60-70%.

As the same investor turns 40, the time frame to retirement continues to shorten and begins to be more balanced between income and growth. An investor between 40 and 50 years of age could have the following investment objectives:

1. Capital Growth

2. Aggressive Income

3. Income

4. Aggressive Capital Growth

An asset allocation could be Cash 0-10%, Fixed Income 40-50%, and Equities 50-60%.

The investor now turns 50 and is getting closer to retirement age, the investment objectives for an investor between 50 and 60 years of age could be:

1. Aggressive Income

2. Capital Growth

3. Income

4. Aggressive Capital Growth

An asset allocation could be Cash 0-15%, Fixed Income 50-60%, and Equities 40-50%.

After turning 60, the investment objectives could now reflect the opposite order for a 20 year old and could be:

1. Income

2. Aggressive Income

3. Capital Growth

4. Aggressive Capital Growth

An asset allocation could be Cash 0-20%, Fixed Income 60-70%, and Equities 30-40%.

As a general rule an investor’s equity percentage is (100 less Investor’s Age). Models are a simplification of reality and other factorss need to be considered, but it is critical for investors to ask themselves “what is my investment objective” and both the selection of assets and percentages should reflect the investor’s risk appetite.