Take the 2-minute tour ×
Personal Finance & Money Stack Exchange is a question and answer site for people who want to be financially literate. It's 100% free, no registration required.

According to What is the best way to learn investing techniques?, you start investing by figuring out your investment objectives.

What does this mean and how do you do it?
Is it trying to figure out how much money you hope to have for retirement, or does it include short term expenses

share|improve this question

3 Answers 3

up vote 3 down vote accepted

What does this mean and how do you do it?

Consider that there are may be more than a few different objectives when it comes to investing:

  1. Retirement
  2. College education
  3. Vacation
  4. Home purchase as new primary residence
  5. Investment property purchase
  6. Emergency fund

Each of these is a different objective that can have different timelines, objectives for the money as well as possible accounts and investment choices. In a sense the question could be stated as "How much money do you need and when do you need it?"

Is it trying to figure out how much money you hope to have for retirement, or does it include short term expenses

The objective could be retirement but doesn't have to be. The short term expenses can be included in various ways. The retirement funds could include what kind of method would be used to make sure expenses can be met as if one is looking at retirement just a few years away the "short term expenses" may come up as part of the retirement living.

share|improve this answer
    
I wish i could accept multiple answers. Your answer combined with BrenBarne is what makes sense to me! –  atk Jul 25 at 1:58

It includes whatever you want to do with your investment. At least initially, it's not so much a matter of calculating numbers as of introspective soul-searching. Identifying your investment objectives means asking yourself, "Why do I want to invest?" Then you gradually ask yourself more and more specific questions to narrow down your goals. (For instance, if your answer is something very general like "To make money", then you may start to ask yourself, "How much money do I want?", "What will I want to use that money for?", "When will I want to use that money?", etc.) Of course, not all objectives are realistic, so identifying objectives can also involve whittling down plans that are too grandiose.

One thing that can be helpful is to first identify your financial objectives: that is, money you want to be able to have, and things you want to do with that money. Investment (in the sense of purchasing investment vehicles likes stocks or bonds) is only one way of achieving financial goals; other ways include working for a paycheck, starting your own business, etc. Once you identify your financial goals, you have a number of options for how to get that money, and you should consider how well suited each strategy is for each goal.

For instance, for a financial goal like paying relatively small short-term expenses (e.g., your electric bill), investing would probably not be the first choice for how to do that, because: a) there may be easier ways to achieve that goal (e.g., ask for a raise, eat out less); and b) the kinds of investment that could achieve that goal may not be the best use of your money (e.g., because they have lower returns).

share|improve this answer
    
Another thing to consider is how much risk you are willing to take to achieve your goals. –  Victor Jul 16 at 8:50
    
I wish I could accept multiple answers! Your answer combined with JB King's is what makes this make sense to me :-) –  atk Jul 25 at 1:57

Financial advisers like to ask lots of questions and get nitty-gritty about investment objectives, but for the most part this is not well-founded in financial theory. Investment objectives really boils down to one big question and an addendum. The big question is how much risk you are willing to tolerate. This determines your expected return and most characteristics of your portfolio.

The addendum is what assets you already have (background risk). Your portfolio should contain things that hedge that risk and not load up on it. If you expect to have a fixed income, some extra inflation protection is warranted. If you have a lot of real estate investing, your portfolio should avoid real estate. If you work for Google, you should avoid it in your portfolio or perhaps even short it.

Given risk tolerance and background risk, financial theory suggests that there is a single best portfolio for you, which is diversified across all available assets in a market-cap-weighted fashion.

share|improve this answer
    
One other factor: Time horizon. Someone retiring in three year's can't tolerate as much risk as someone retiring in 30 years, since there's less time for volatility to average out. –  keshlam Jul 19 at 3:25
    
With respect, what you described is just a possible contributing factor toward risk tolerance and in my opinion shouldn't really be considered separately. –  farnsy Jul 20 at 3:42
    
Fair point, but I think it's important to call it out explicitly as a contributing factor when teaching people how to evaluate their risk tolerance. –  keshlam Jul 20 at 4:41

Your Answer

 
discard

By posting your answer, you agree to the privacy policy and terms of service.

Not the answer you're looking for? Browse other questions tagged or ask your own question.