Four Investment Objectives Define Strategy

Four Investment Objectives Define Strategy
By Ken Little, About.com

In broad terms, four main investment objectives cover how you accomplish most financial goals.
These investment objectives are important because certain products and strategies work for one objective, but may produce poor results for another objective.

It is quite likely you will use several of these investment objectives simultaneously to accomplish different objectives without any conflict.

Let’s examine these objectives and see how they differ.

Capital Appreciation

Capital appreciation is concerned with long-term growth. This strategy is most familiar in retirement plans where investments work for many years inside a qualified plan.

However, investing for capital appreciation is not limited to qualified retirement accounts. If this is your objective, you are planning to hold the stocks for many years.

You are content to let them grow within your portfolio, reinvesting dividends to purchase more shares. A typical strategy employs making regular purchases.

You are not very concerned with day-to-day fluctuations, but keep a close eye on the fundamentals of the company for changes that could affect long-term growth.

Current Income

If your objective is current income, you are most likely interested in stocks that pay a consistent and high dividend. You may also include some top-quality real estate investment trusts (REITs) and highly-rated bonds.

All of these products produce current income on a regular basis.

Many people who pursue a strategy of current income are retired and use the income for living expenses. Other people take advantage of a lump sum of capital to create an income stream that never touches the principal, yet provides cash for certain current needs (college, for example).

Capital Preservation

Capital preservation is a strategy you often associate with elderly people who want to make sure they don’t outlive their money.

Retired on nearly retired people often use this strategy to hold on the detention has.

For this investor, safety is extremely important – even to the extent of giving up return for security.

The logic for this safety is clear. If they lose their money through foolish investment and are retired, it is unlike they will get a chance to replace it.

Investors who use capital preservation tend to invest in bank CDs, U.S. Treasury issues, savings accounts.

Speculation

The speculator is not a true investor, but a trader who enjoys jumping into and out of stocks as if they were bad shoes.

Speculators or traders are interested in quick profits and used advanced trading techniques like shorting stocks, trading on the margin, options and other special equipment.

They have no love for the companies they trade and, in fact may not know much about them at all other than the stock is volatile and ripe for a quick profit.

Speculators keep their eyes open for a quick profit situation and hope to trade in and out without much thought about the underlying companies.

Many people try speculating in the stock market with the misguided goal of getting rich. It doesn’t work that way.

If you want to try your hand, make sure you are using money you can afford to lose. It’s easy to get addicted, so make sure you understand the real possibilities of losing your investment.

Conclusion

Your investment style should match you financial objectives. If it doesn’t, you should see professional help in dealing with investment choices that match you financial objectives.

http://stocks.about.com/od/investingstrategies/a/021906technque.htm

Return

Return is the primary motivating force that drives nvestment. It represents the reward for undertaking investment. Since the game of investing is about returns (after allowing for risk), measurement of realised (historical) returns is necessary to assess how well the investment manager has done. In addition, historical returns are often used as an important input in estimating future (prospective) returns.

The Components of Return

The return of an investment consists of two components.

Current Return: The first component that often comes to mind when one is thinking about return is the periodic cash flow (income), such as dividend or interest, generated by the investment. Current return is measured as the periodic income in relation to the beginnin price of the investment.

Capital Return: The second component of return is reflected in the price change called the capital return - it is simply the price appreciation (or depreciation) divided by the beginning price of the asset. For assets like equity stocks, the capital return predominates.


Thus, the total return for any security (or for that matter any asset) is defined as:

Total Return = Current Return + Capital Return

The current return can be zero or positive, whereas the capital return can be negaive, zero, or positive.