HOW TO: Set the right investment objectives for success

There are several important elements which determine your investment success.

Of course the return is a big one but there are other key elements which determine the success of investments from your perspective and need to be taken into consideration when setting your investment objectives.

There are several important elements which determine your investment success.

Of course the return is a big one but there are other key elements which determine the success of investments from your perspective and need to be taken into consideration when setting your investment objectives.

It is important to set investment objectives which are realistic, achievable, matched to your lifestyle goals and consistent with your investment risk profile.

“I want a high return with no risk” is a great example of an objective fraught with danger.  Why?

  1. Because it is unrealistic and sets you up for disappointment – unfortunately there are no investments which deliver a high return without any risk. However you can do a lot to maximise investment returns and minimise your risk.
  2. Because it is not specific enough. It does not take into account how much you will need to live on, how much you need to invest, what level of risk you are comfortable with or what you would prefer to invest in.

Your investment objectives should be governed by your planned lifestyle, your retirement capital, your tolerance for investment risk and your inclinations and preferences. These elements all impact on your decision about the target rate of investment return you are happy with.

Your Planned Lifestyle:

The lifestyle you would like to enjoy in retirement has a major bearing on the most appropriate investment objectives for you. If you have not set objectives for your retirement lifestyle you may find that in retirement you have enough money to live on and play plenty of golf but not enough to fund the regular overseas trips you have always dreamed of.

Generally speaking, the greater your expenditure requirement the higher the rate of investment return you will need.

So, the first and arguably most important step in setting your ideal investment objectives is to decide what you want to do in retirement:  Travel a lot?  Help your children and grandchildren?  Play plenty of golf?  Spend more time at the holiday house?  Semi-retire and work on things you really like?

Once you have decided what you want to do, you can estimate how much it will cost.

Your Retirement Capital:

Retirement capital describes your financial resources for, and in, retirement. This may be your superannuation, other investments or an expected inheritance. The more retirement capital you have, the greater your flexibility and options in choosing how you can enjoy your retirement.

Considering how much retirement capital you have enables you to set investment objectives, and may even see you changing your superannuation contribution plans right now, to be able to successfully achieve your ideal retirement lifestyle.

You can use our Strategic Planning and Investment Calculator to see how different retirement capital and expected lifestyle expenses impact the investment return you require.

The more retirement capital you have and the less you plan to spend in retirement, the lower the rate of return on your investments needs to be. Now before you shake your head and say ‘why would I be happy with a lower rate of return’ you need to consider the next element – your risk tolerance.

Your risk tolerance:

Your investment risk tolerance, or investment risk profile, is how comfortable you are with the risk of losing money.

Generally speaking, someone who is ‘more comfortable’ with greater investment risk will be able to target a higher rate of return.

So, if we return to the question above ‘why would I be happy with lower rate of return’ the answer may be that you are not comfortable with the risk of losing money on a high risk investment. Therefore you may need to either rethink your retirement lifestyle objectives or how much money you will need to dedicate to your retirement capital.

Your inclinations and preferences

How you feel about different types of investment options can have a large bearing on the right investment objectives for you. You may have a strong preference for holding shares because you are very comfortable with the process having grown up watching your parents monitor and discuss their share portfolio. On the other hand, you may want to steer clear of the volatility of the share market, feeling much more comfortable with property investment where you already have experience. You may feel passionately that you should support and invest in Australian businesses or you may not care where your investments are as long as they are ‘green’.

Your personal preferences need to be taken into account in your investment planning and therefore must be represented in your investment objectives.

Sometimes a particular preference may be detrimental to good investment practice. For example someone may only want to invest in property and nothing else. While this approach could work, it could in fact work against other important investment objectives they have. This is where an experienced investment advisor can work with you to identify and explain why it is not in your best interest so you are able to create your most successful investment objectives.

Income vs Capital Growth Investments

Some people say they want to target certain investments that produce high income. While that does appear to make sense you need to look at this in the context of your overall investment portfolio and the total return on an investment i.e. income plus capital growth. If your investment portfolio is full of good income producing investments, but they lose their capital value, in the long run this approach will work against you.

We recommend your focus should be on the expected total return from individual investments and the overall portfolio. That is, what is the expected income plus capital growth.  In many cases the capital gains or losses will be higher than the cash flow income from investments.

For a more in-depth understanding of how your Investment Objectives, your Risk Profile and your Investment Strategy are linked download our e-book The Investment and Financial Planning Process to Maximise Your Financial Future.

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