In my previous post, I talked about the styles of investing that majority of investors subscribe to. In it, I also mentioned that knowing one’s investment objective is key to understanding oneself before plunging into the investment world. To be more specific, by investment objectives I mean what do you hope to get out of your investments. Is it short term gains or long term income investment? Most of us should be working towards long term income gains. Thus, knowing what you want to achieve out of your investment will guide you along when you are making your investment decisions.
How to determine your investment objectives?
There are really no hard and fast rules to go about this. However, I would like to present some guiding questions which may help you go about crafting your own investment objectives. These investment objectives should be the main overarching lighthouse that guide your investment decisions.
1) What’s your risk appetite?
Are you someone who can sleep well at night if say your stock took a 10 percent plunge during the trading day? Or are you the type that worry even if the stock were to fall slightly. These questions are important because investing shouldn’t stress you out too much and compromises your health. You should look for something you are comfortable with and invest in it. Typically, a younger investor would be more risk adverse because they know that their investment time frame is longer than someone in their 50s or 60s.
2) What’s the proportion of your savings you are using for investment?
If you are putting up 90% of your savings to investment then it is important to diversify your portfolio with safer stocks because a large portion of your savings are inside it. I am not saying that its wrong to use 90% of your savings to invest. Just that if you are putting such a large proportion it pays to be a bit safer with it. By answering this question, it should help you decide how to distribute your money in different investments of different risks.
3) Are you short term or long term?
Are you someone who gets excited over small price increase and are eager to sell it to realise the gains or someone who is very patient and wouldn’t mind to wait for 10 years to realise the gains? This is important because it will determine what kind of stocks you will tend to choose. Those who are short term tend to trade on price action, are quick to take the profit off the table and then plunge into another trade. Someone who is short term takes on more risk than someone who goes for the long term since there have been more bull markets than bear markets in the long run.
By answering some of these guiding questions it should give you a better understanding about the type of investor you are and what is at stake. Only when you know the type of investor you are can you go on to set a relevant investment objective and subsequently your style of investing to achieve your objective.
For me personally, I plan my investment objectives in 5 , 10, and 15 years so I get a holistic view of how my investing objective and style will change eventually. For instance, in 5 years, I am looking for more short term gains to quickly multiply my capital before I switch more towards looking for dividend paying stocks for the long run. I will share more about my investment objectives in the next post. That’s all for today! Have a great Christmas ahead! 🙂