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Module 2 - Part 2/5: Defining your investment objective

April 21, 2024
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EasyEquities
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EasyEquities

In this article, we go over the importance of having an investment goal.

Welcome to the EasyEquities Mentorship program, where we make investing EASY for you!

We have prepared 6 modules that we will post on FinMeUp over the month of July.

The modules are intended to give investors the necessary knowledge to start their investing journeys.

let's get righ into it.

What is your goal?

One of the first steps to building your investment strategy is to understand your investment objective. Why? Because this will determine how much time you have to invest.  An investor's time horizon is inherently tied to risk.

The more time you have to reach your objective, the more risk you can take which means you may get better returns. The opposite is true if you have less time to reach your objective. The less time you have, the less risk you can take.

Other factors to consider are your risk tolerance and your ability to take out risk. Your risk tolerance refers to how much risk you can take out without getting uncomfortable. Your ability to take out risk can be affected by your time horizon, dependants, and income.  

Every investor is different.

Investors could have any objective such as retirement, buying a house, or sending their kids to university. Here are two scenarios: 

Scenario 1

Teboho is 23 years old and has recently begun his investing journey. He has no kids yet he can tolerate a fair amount of risk and his objective is to retire from his investment portfolio by the age of 65. That is still 43 years away! 

Teboho can afford to take on quite a bit of risk thanks to his time horizon of 43 years, his ability to take risks and his willingness to take risk.

Scenario 2 

On the other hand, Emily is 63 years old and has the same objective of retiring at the age of 65. This time, Emily has 2 years to reach her goal.

Because of her time horizon, she cannot afford to take out as much risk as Teboho . 

Other factors to think about:

If your objective is to retire, where do you want to retire?
What lifestyle do you want when you retire?
What is the required growth to reach your objective?
Do you want to leave money behind for your family?
How much loss can you tolerate? Will you sleep at night if you have lost 40%?  

Take some time to decide what your investment objective is and be very intentional about it.

 


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