THE BEECHMONT CREST ONLINE GUIDE TO STOCKS AND INVESTING
Assessing investment objectives and strategies
All investors want to make money, of course; but the question of investment strategy is more complicated than that. Investment objectives must be evaluated in terms of both risk and return.
The importance of risk:
An investment strategy cannot be based solely on an investor’s desire for returns----since all investors want to maximize their gains. Risk must also be figured into the equation.
Financial advisors, therefore, must carefully assess each investor’s risk tolerance.
Risk tolerance is affected by:
Age
Family situation/marital status
Cash reserves
Insurance coverage
Psychological makeup
Common investment strategies (based on risk tolerance)
Capital preservation: This strategy is appropriate for investors who are risk adverse, or who will need to liquidate investment funds in the near future. With a capital preservation strategy, the rate of return must be greater than the rate of inflation. The goal is to preserve the purchasing power of the investment.
Capital appreciation: This strategy is suited to investors who can tolerate some risk in anticipation of long-term gains. It is commonly used for investors who want to increase the value of their investment to use for spending needs in the future, such as a young child’s college education.
With a capital appreciation strategy, most of the gains in the portfolio’s value are achieved through capital gains: i.e., buying assets at a low price and selling them at higher prices.
Current income: In this case, the investor wants the portfolio to generate supplemental income rather than capital gains. This strategy is common among retirees.
Total return: The total return strategy is similar to the capital appreciation strategy. With this strategy, however, the value of the portfolio is increased through a combination of capital gains and reinvestment income.
