Listen to this articleEvery investor has his own set of unique investment objectives. What he wants in life, i.e. his requirements and needs have a direct impact on his pattern of investment and its objectives.
In simple terms, your investment objective is the specific financial result you want your money to achieve, and by when, whether that is building a retirement corpus, funding a child’s education, or growing savings faster than inflation.
It is the “why” behind every SIP, mutual fund, or asset allocation decision you make.
Before getting into the seven major factors, try to answer the below question.
Table of Contents:
1. How to Stay Disciplined When Market Volatility Pulls You Away From Your Investment Objective
2. Determining your requirements
9. Why You Should Not Deviate from Your Investment Objective?
1. How to Stay Disciplined When Market Volatility Pulls You Away From Your Investment Objective
If you feel deviated from your financial goals, you can follow these simple steps to be right back on track to meet your financial goals.
i. Create a market-downturn financial contingency plan
A contingency plan will keep you prepared for crises and to mitigate the risk. It prevents panic and promotes action.
“Intellectuals solve problems; geniuses prevent them”. – Albert Einstein
Don’t wait for a disaster to happen, be proactive, plan for the worst, and be prepared.
This is the list of things to do:
- Prepare for emergencies
- List your Mediclaim policies,
- Ensure adequate family health insurance coverage,
- Create an information vault.
When you plan, you’re prepared to deal with the unexpected.
When you’ve done everything to handle a bad situation, you can approach problems with a calm attitude.
It creates flexibility, quicker action, and peace of mind.
Having a clear investment objective and emergency preparedness strategy helps investors stay focused even during volatile market conditions.
To know more read: coronavirus financial contingency plan.
ii. What should you do with your investments?
During a sharp market fall, panic can tempt you to
a) Withdraw to avoid further losses and
b) To time the market bottom.
“Panic is not an effective long-term organizing strategy”. – Starhawk
Hence avoid panic.
Also avoid, timing the market bottom as it is difficult to know when to buy at the lowest price and when to sell at the highest price.
You may sell your investments only to see the markets recover soon after.
Holding your investments during downturns has been an effective strategy.
Do you want to make any significant changes to your financial plan in a moment of panic? No? Then it’s better to stay invested.
“Patience is bitter, but its fruit is sweet.” Aristotle
If you are in genuine financial need, lean on your debt investments and emergency funds first, and treat redeeming long-term equity investments as a last resort.
One of the primary objectives of investment is long-term wealth creation, which requires discipline and patience during temporary market corrections.
For more info read: How to take advantage of the coronavirus crash.
iii. Steps to recover faster and better from the Stock market crash.
a) By a portfolio revamp
Test your funds’ performance. If you have any poor-performing funds, it is better to move them to better performing funds before the stock market recovers.
This is also called as portfolio optimization.
Experiments on portfolio revamping worked.
Portfolio optimization works effectively only when your investment goals and objectives are clearly identified in advance.
To know if you should redeem and reinvest now, read: How to revamp for faster and better results.
b) By a portfolio rebalance
After the stock market crash, your asset allocation would have changed.
Then you are supposed to bring it back to the original asset allocation.
This is portfolio rebalance.
This enforces a level of discipline and also balances risk and reward.
It allows you to buy assets at a cheaper rate and sell them at a higher rate.
“The most important thing you can have is a good strategic asset allocation mix.
So, what the investor needs to do is have a balanced, structured portfolio – a portfolio that does well in different environments…. we don’t know that we’re going to win.
We have to have diversified bets”. -Ray Dalio
Asset allocation decisions should always align with your investment objectives, risk profile, and investment time horizon.
For more, read: How portfolio rebalance is done.
c) Choosing on SIP
You can either stop, continue, or increase SIP.
There is a Dutch proverb that says: “He that has a choice has trouble”.
So to not fall into trouble, we tried finding the best choice on SIP.
Two experiments with three investor categories were conducted, each of them chose an option.
One to stop, another to continue and another to increase SIP (all during the market fall).
In both the experiments, the one who chose to increase his SIP during the market fall earned the highest portfolio value.
a. The one who stops his SIP incurs a loss.
b. The one who continues his SIP gains better.
c. The one who increases his SIP gains the highest.
Hence increasing SIP will help you recover faster and better.
For long-term investing goals like retirement or children’s education, continuing SIPs during downturns may support better wealth accumulation.
For more, read: How to play smart with your SIP.
Have you heard of this proverb? “Time waits for no one”.
Yes, as the saying, if you want your portfolio to recover faster, do these before the market recovers.
This is the time to do it, as the time once lost is always lost.
Adhering to the above steps will help you reduce your risks and also help you recover when the market recovers.
Let us understand the influencing factors behind our investment objectives.
2. Determining your requirements
Follow the path that helps you achieve your short-term and long-term goals.
These can include funding the education for your children, or investing in your business for expansion, retirement or travel plans, etc.
You can directly address your requirements by identifying these goals with your investment.
Understanding the purpose of investment helps investors choose suitable financial products based on their future requirements and priorities.
Your goals naturally fall into three time buckets, and knowing which bucket a goal sits in shapes how much risk it can safely carry:
|
Time Horizon |
Typical Goal Examples |
What It Usually Means |
|
Short-term (up to 3 years) |
Emergency fund, a planned holiday, a car down payment |
Preserve capital; avoid volatility |
|
Medium-term (3–7 years) |
Home down payment, a child’s higher education a few years away |
Balance growth with safety |
|
Long-term (7+ years) |
Retirement corpus, a child’s marriage, long-term wealth creation |
Favour equity-oriented growth |
3. Risk Tolerance
Our age and the emotional make-up, also largely impact our ability to tolerate risks. Risk tolerance levels may differ for every part of your portfolio.
Risk tolerance is one of the most important factors of investment because it directly influences investment choices and expected returns.
For example, an investor who cannot stomach a 20% portfolio dip may lean towards debt-oriented funds, while one who can stay invested through volatility may choose a higher equity allocation for the same goal.
4. Income Level
Your absolute income level as well as your return requirements, can largely effect your decisions relating to investment.
Our income can also influence our risk preferences.
Investors with higher income may be more inclined towards riskier strategies, as they can conveniently contribute to added investment capital at the time they face any losses.
Income stability and cash flow are important investment factors to be considered before deciding asset allocation or investment targets.
A salaried employee with a predictable monthly income, for instance, can typically commit to a fixed SIP more comfortably than someone with irregular, commission-based earnings.
5. Tax Liability
Your tax or any special tax circumstances are a few considerations that will help you determine ways to seek the maximum utilization from your tax-benefiting investment schemes.
Tax-saving opportunities also form part of the objectives of investment planning, especially for salaried and high-income investors.
For example, an investor in a high tax bracket may prioritise tax-efficient instruments, while someone with a lower taxable income may weight this factor less heavily.
6. Total Wealth
Our investment objectives should also consider the assets outside our portfolio.
The value of a person’s expected pension, or his other retirement benefits may influence the return objectives and risk tolerance of his investment portfolio.
Moreover, our wealth levels can also impact the way we live (our lifestyle).
A desired standard of living determines our risk tolerance factor, and should be considered with your investment objectives.
Holistic investment planning requires evaluating total wealth, liabilities, lifestyle goals, and future financial obligations together.
For instance, an investor with a substantial employer pension may afford to take more equity risk in their personal portfolio than one relying solely on their own investments for retirement.
7. Investment Time Horizon
This may require us to ask questions such as:
- When do you plan to draw the assets in your portfolio?
- Do you prefer to choose short or long term maturity assets?
- Do you have enough time for recovering from a descending market?
- How important is capital preservation, for meeting an urgent financial need?
Different types of investment goals require different time horizons, ranging from short-term liquidity needs to long-term retirement planning.
8. Liquidity Payment
This is about the ease with which you can transform your assets into cash, at or near to the latest fair market value.
This may require us to ask questions such as: do we need an investment portfolio to liquidate easily, or can we wait some more?
Liquid assets examples include cash at hand, cash at bank, fixed deposits and liquid funds.
Liquidity needs should always be considered while setting investment objectives and constraints for your portfolio.
For example, funds earmarked for a home down payment in the next year are best kept liquid, while a retirement corpus that is decades away can stay invested in less liquid, growth-oriented assets.
9. Why You Should Not Deviate from Your Investment Objective?
Market fluctuations and financial crises can create panic among investors, but reacting emotionally may harm long-term wealth creation.
Your investment goals are designed to achieve important financial objectives like retirement, children’s education, or financial independence over a long period.
Instead of making impulsive decisions during market downturns, investors should stay disciplined, review their asset allocation, and continue investing according to their financial plan.
The primary objective of investment planning is to achieve financial goals systematically, not to react to short-term market volatility.
10. Other Considerations:
You must acknowledge your overall financial assets, expected income sources and obligations that affect your portfolio under management. Questions that come up here include the following:
- Does your job have an adequate retirement plan, or will you have to fund the same from your investment portfolio?
- Is a stock-purchase plan from your employer, an important part of your personal wealth or is it a diversification issue that arises when making other portfolio choices?
- If you get tax-deferred or tax-qualified assets from your employment, what impacts does these have on your investment decisions?
Once your investment provides you the answers to all these questions, you will have surely succeeded in achieving all its objectives.
Here, you may even seek help from your financial advisor, whose advice can be essentially valuable towards clarification as well as accomplishment of your investment objectives.
However, while doing this, you must ensure that he is not selling any investment product, therefore has no personal interest that can cause a conflict or bias in his investment advice.
11. Frequently Asked Questions
i. What is an investment objective?
An investment objective is the specific financial goal your investments are meant to achieve, such as retirement, a child’s education, or wealth creation, along with the time frame and risk level you are comfortable with to get there.
ii. What are the main objectives of investment?
The main objectives of investment are generally safety of capital, liquidity, income generation, tax efficiency, and long-term capital appreciation, weighted differently depending on the investor’s goals, income, and risk tolerance.
iii. What factors determine your investment objectives?
Your investment objectives are shaped by your requirements, risk tolerance, income level, tax liability, total wealth, investment time horizon, and liquidity needs, as covered in detail above.
iv. How do I set my investment goals?
Start by listing what you want your money to achieve and by when, then match each goal to a time horizon (short, medium, or long-term) and an appropriate mix of risk and return, ideally with the help of a Certified Financial Planner.
v. Why should I not deviate from my investment objective?
Deviating from your investment objective, especially during market volatility, often means abandoning a long-term plan for a short-term emotional reaction, which can derail goals like retirement or a child’s education that took years of disciplined investing to build towards.
Please share your views on these 7 major factors that determine your investment objectives.
Were they useful to you?
To make these principles and techniques work in your favour, you can start with an Initial Guidance Call (No Cost) with our Certified Financial Planners, who can help you translate these seven factors into a plan tailored to your own goals.
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