SETTING THE INVESTMENT OBJECTIVE

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The first step for the investor is to set the investment objective. Which would vary for individuals, pension and mutual funds, banks, financial institutions, insurance companies, etc.

For instance the objective for a pension or mutual fund or insurance company maybe to have a cash flow specification to satisfy liabilities at different dates in the future. These liabilities would include redemption, dividends or claim settlement payouts.

For a bank it maybe to lock in a minimum interest spread over their cost of funds.

For the individual investor the objective maybe to maximize return on investment. A more appropriate word would be ‘optimize’. As the individual would achieve optimum return at optimum risk. To maximize return would imply the maximization of risk, which would not be practical or sustainable.

It would be quite in order to present a sample investment objective for further analysis and modification to suit the requirements of individual investors. The objective would revolve around aspects of income generation, growth of the investment capital, stability and implementation.

Sample Investment Objective:

Income:

In the year 20XX-XX, I need an income of (state the amount here).
In the year 20XX-XX, I need an income of (state the amount here).

Growth:

In the year 20XX-XX, I need an investment capital growth of (state the amount here).
In the year 20XX-XX, I need an investment capital growth of (state the amount here).

Stability:

Maintain a reduced factor of risk to achieve an optimum level of return.

Implementation:

Risk control tools to reduce risk exposure at all times.
Money management tools to ensure better flow of funds between the various asset classes.
Document all transactions for future analysis, income review and taxation purposes.

At the time of the documentation and setting of the investment objective, the investor would be called upon to conduct a SWOT analysis to get a better perspective of his present financial condition and the strengths, weaknesses, opportunities and threats he is faced with. Aspects to consider would be as listed below:

Sample SWOT Analysis:

Strengths:

Whether he is living in own home/house.
Whether he owns office space (may even be generating rental income).
Whether the investment knowledge base is available.
Whether the investment system, management process, and platform are available.
Whether the investment capital is available.
Others; list them.

Weaknesses:

Level of risk tolerance; would be a weakness if it is high.
Level of money management skills.
Whether there is enough income generation through present investments.
Whether there is a current expenses overrun.
Others; list them.

Opportunities:

Whether there is potential for growth.
Others; list them.

Threats:

Inflation risk.
Interest rate risk.
Conduct and actions of the peer group and extended family which may cause financial damage or harm.
Others; list them.

Of course, the investor is welcome to list other strengths, weaknesses, opportunities and threats he may be faced with or even expects to be faced with sometime in the future. The purpose here would be to reinforce and/or increase the strengths and opportunities while restricting and/or reducing the weaknesses and threats.

The next step would be for the investor to document his risk tolerance. A sample would be as stated below:

Sample Risk Tolerance Review:

I have been through the stock market crash of 20XX-XX. Amongst the reasons for coming out relatively unscathed is that I did not sell any stock positions. However, during the up-move I sold stock positions at a reduced level of profit and also at break even points. This has resulted in a reduced level of income generation and investment capital growth; causing an erosion of the investment capital on account of current expenses and contingency provisioning.

Having learnt good lessons over the years, I have concluded that it would be prudent to reduce the risk tolerance levels from high to medium. This would require me to follow the investment systems and processes already known and adopt a more disciplined manner of addressing the stock market.

Thereafter, it would be quite in order to state the investment time horizon. It would be prudent to restrict the time horizon to one year at a time; along with a periodic performance review during and at the end of the investment time horizon. This would be for the primary purpose of improving performance over the subsequent years.

Sample Investment Time Horizon:

The present investment time horizon is for a period of one year; which is January 20XX to December 20XX. This would see me go through four quarters; which are January – March, April – June, July – September and October – December.

Last but not the least, the investor must state and document the matters that would require his attention in the future. Some such matters are listed below:

Matters for attention in the future:

Build human capital and knowledge base.
Life and disability insurance.
Investment in real estate (residential and office space).
Children education and resource allocation.
Financial security for the family.
Savings for retirement.
Wealth creation.
Charitable activity.
Others; list them.

As a word of caution and a disclaimer of sorts, the investor must appreciate that the above documented sample investment objective, is but a sample. The investor would be required to document his own investment objective; and subsequently analyze and appreciate whether he has been able to achieve such investment objectives. It would be fair to say that the setting of, monitoring; and subsequent analysis and revalidation of the investment objective against real time investment results is a dynamic process.

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