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The 'Why' of Investing
Why am I investing??? What are my goals?
In the heat of trading the markets, sometimes investors can lose sight of themselves and their own tolerances and goals in the pursuit of profits in a very fast trading world. I think it does us all a bit of good as investors and traders to step back a moment and remember what the goals and boundaries we set for ourselves are, as a reminder of why we do what we do.
Investing goals can be broken down into a few simple categories. These are determined by personal financial conditions, investment time horizon, and market outlook. Other factors that impact investment decisions are individual risk tolerance and market expectations.
Without realistic expectations, investors can be disappointed by modest returns and possibly subject themselves to excessive risks. A historical performance analysis can put investment goals and actual results into the proper perspective.
The basic rule of 72; divide 72 by the annualized return will yield the number of years to double an investment. This process helps investors understand the power of compounding interest and how modest returns can achieve significant results.
The basic goal of investing is to make money. The more important question is how and for what purpose? People invest for many reasons; retirement, paying for college or a first home or just for trying to increase returns versus general savings. These motivations may also impact the choice of investment vehicles or the personal time commitment to monitoring the markets.
Growth, Income, Capital Preservation, and Speculation are the specific investment objectives that are selected when a brokerage account is opened. In addition, some trading experience questions help a broker authorize trading for appropriate investments.
The goals selected and the past history play an important role is deciding what are suitable investments. They may also ask how active a customer has been with their transaction history or what strategy experiences do they have in the market.
It is important to define success prior to opening an account so that results can be measured afterwards against that objective. This also may also discourage straying from an investment plan and keeping focus on the overall goals. It can be common for investors to have separate objectives for different accounts.
Long term growth is a typical goal for someone with many years until the money is needed. A consistent and steady return without much volatility or significant drawdown can be ideal for money that is not going to be needed immediately. This strategy does have the luxury of time to ride out any lack of performance in the markets. The rate of growth might possibly be impacted by the choice of investments in specific sectors or bond choices.
Producing income is sometimes the goal for a retirement account after the growth phase of investing. After decades of working to build principal, the objective of these accounts often change over time. The design of an Income account may be to provide regular distributions through dividends or interest payments on bonds. As the individual investor gets closer to this income stage, less risk is encouraged because of immediate needs for the funds.
While the goal of preserving capital is always at work for most traders, the reality of the investment paradigm is often that risk is a function of return. The return in a cash or money market account is usually going to be less than that of the general market but the principal is not typically at the same risk. The risk versus reward balance plays a major role in determining suitable vehicles for capital preservation.
Speculation is the most aggressive and sometimes the most active of the trading objectives. All investments require risk control and discipline, but speculation often requires the most focus and attention. Because of the shorter time horizon, speculative plays have the entire trading methodology condensed. The process of identifying candidates, execution with risk control, and managing a trade can occur very quickly requiring a disciplined plan.
A reason to invest is obviously to make money; but a more important factor to focus on is how it is to be used. The process of thinking out the goals can clarify the objectives of the actual investment process.
Building a portfolio in a stable, low risk environment with the high return growth is a goal that has to be realistically balanced with market realities to choose the best personal investments.
Remember, Plan Your Trade and Trade Your Plan!