Defining your investment objectives is the core step in crafting your own needs out of your financial mission.

Your money should always be working – it’s sole purpose is to earn more money for you. If you’ve managed your financial affairs wisely, when you reach retirement age, your portfolio should be large enough to replace the household income you need – that is your goal. Without affecting your standard of living even though you are no longer punching the proverbial time clock.

Simple questions to help you understand the scope & magnitude of this topic:
• What is the purpose of your money?
• What do you want it to do?
• How much risk are you willing to take to achieve above-average returns?
• When do you need this money?
• Do you want your money to grow or preserve its current value?

The answers to these questions are the fundamental elements of determining your investment objectives. You will need to spend some quality time on writing your objectives down and understanding your goals. Things do change year over year, therefore you need to be ready to adjust those investment objectives accordingly.

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Here are 3 benefits of defining your investment objectives
1. Define investment objectives to lower your overall risk:
Avoid securities and assets that don’t fit with your goal. Setup an emergency portfolio where you’re investing in intermediate duration tax-free municipal bonds. The objective, is to always provide a safe, emergency source of backup household income that generates cash that you can live on, even if all your other sources of income get cut off completely. At that point, it wouldn’t matter if stocks crash and they are dirt cheap. It doesn’t matter if the investment of a lifetime comes along. The entire purpose of having an objective is to make sure you never wake up in a position of having lost money you can’t afford to lose, or coming up short from the amount of cash you need.

2. Define your investment objectives to avoid mistakes:
If your objective is to grow your investment year-over-year with low risk, then you should pick stocks in great companies (large market cap), that have proven track records, that offer dividends. Like the performance you’d see with Microsoft, IBM, AT&T, McDonald’s.

As you look for potential holdings to add to that portfolio, keeping the objective in mind can help you avoid adding something that might appear attractive on different grounds.
High return stocks can always lead to high volatility.
They are not particularly good long-term holdings. No matter how attractive they appear, they don’t fit your investment objectives – specifically this portfolio. Click on Cyclical vs Non-Cyclical to read about types of investment

3. Define you investment objective to keep your eyes on the Finish Line:
Make sure your asset allocation encompasses an array of stocks, bonds, mutual funds, ETFs that spread over different sectors and industries. A diverse portfolio protects your investment against volatility, and fluctuation in the market. Money is only useful to you for what it can do. Stick to your mission.

The different types of investment objectives you might pursue:
• Principal protectiong and Capital preservation
• Current liquid and net worth
• Risk aversion
• Investing time horizon
• Income levels and strategies
• Expense levels
• Planned charitable contributions
• Restrictions on security selection
• Growing the principal as fast as possible, so you have more money in the future
• Generating the highest amount of risk-adjusted passive income as possible, so you have more household income from your assets

The objective of capital preservation is to protect your initial investment by choosing investments that minimize the potential of any loss of principal.