Aligning your Investment Goals with Your Portfolio

The investment process starts with taking time to devise your investment strategy and setting realistic goals for your capital.  Creating a clear objective over a specific time frame along with risk guidelines is the first step in getting started.  The more time you spend thinking about how you will invest your capital the better the chance of you achieving those goals.  Some of the items that should be considered are why you’re investing, your time horizon and your risk appetite.

Investment Goals

The first step is to clearly spell out why you are investing.  If your goal to achieve long term growth for retirement, or to increase your wealth for short term discretionary income, you need a plan to accomplish these goals.  One way you may start this process is to try to figure out your goals for the next 1-3 years 4-6 years and 7+ years.  By doing this you can align your objectives with your short term, medium term and long term goals.

Your investment time horizon describes how long you plan on investing. By evaluating your investment tenor you can ponder what strategies will allow you to achieve those goals.  Longer investment periods give investors the flexibility to take more aggressive risks given there is time to recoup capital during an adverse market move. 

The risk that you are willing to take will directly reflect the reward you will receive.  Fixed income products that are very safe such as treasury bills, will return a very low yield relative to riskier assets such as common stocks.  Each investor should outline their risk-reward appetite prior to deciding on a particular trading strategy.

All trading strategies have different liquidity provisions which are generally correlated to the risk an investor is willing to assume.  Stocks that are difficult to buy and sell tend to have a greater liquidity risk than well-established stocks that may be sold immediately.  Investors should determine prior to executing trades on these types of stocks what kind of risk is associated with low liquidity and the prospective reward of trading these stocks.

Risk versus Reward

Determining the appropriate risk that you will take should be directly related to factors such as the reward you expect and your time horizon.  Investors are paid directly for the risk they assume.  Investors who are looking for long term growth may afford to take riskier positions while those who are already retired and live on a fixed income might consider investments which focus on capital preservation.

Prior to initiating any positions using a strategy an investor may determine what their objective on the investment is. If the objective is to generate long term growth gains, they might look at common stocks that are undervalued.  If their goal is to generate income, they may find high yielding dividend stocks that have a high dividend yield.  A dividend yield is the yield an investor receives from the dividend at the time of the purchase of the stock.  For example, a stock that has a $2 dividend over the course of a year that costs $40 per share will have a dividend yield of 5%.  If the stock remains at 40 for the entire year the investor will earn 5% on his capital.

Investors who are looking for quick gains may need to find assets such as common stocks that are volatile and provide quick appreciation or depreciation.  Investors that trade quickly such as day traders may purchase and short stocks and need to stick to their plan to achieve success.  One of the most common mistakes a day trader can make is to hold a position that is moving against them beyond their risk threshold and time horizon. 

Making an investment is a process that needs to be thought out completely to increase the chances that your investment will produce positive returns.  The more an investor aligns their goals to their investment strategy the better the chance the investor may have to meet their goals.

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This article is a guest blog written by easy-forex