The individual asset or security you purchase must meet your investment objective(s) before investing. Your financial or money goals must line up with your investment objectives.
In her article "Setting Your Money Goals" from last week, Miriam Amissah offered advice on creating SMART financial objectives. Once your financial objectives have been established, the following step is to align your investments with your financial goals.
The goals you have for your investing portfolio are known as your investment objectives. They can involve increasing income, obtaining capital growth, or protecting wealth. In plainer terms, you can invest to achieve your financial goals, such as purchasing a car or home, paying for education, going on vacation, owning real estate, setting up an emergency fund, etc. If it fits the goal of the investment.
You must ask yourself, "What is your investment need?" before deciding on your investment goals. Here, the following issues should be taken into account:
Is my investment for steady income? - Will it provide you with consistent cash flows to cover your monthly expenses, etc.? For instance, certain bonds pay interest semi-annually, and some mutual funds and unit trusts might give you returns each month to assist you in covering your fixed monthly bills or school costs. Owning or operating a retail business can generate consistent cash flow to cover your expenses.
Is my investment intended to generate capital gains? - This is to witness genuine development in your major investment before you make a significant purchase, such as a car or a piece of real estate.
You can also consider buying a piece of land that could increase in value over time.
Is my investment intended to protect capital? – to prevent value from depreciating due to time. According to the time value of money theory, a cedi today is worth more than a cedi tomorrow, meaning that what a cedi can buy today might not be available in the future. It is crucial to understand that these goals are not mutually exclusive; sometimes, you can accomplish many goals with a single investment instrument.
It is crucial to provide answers to these questions because they will influence your choice of investment strategy.
It would be better to invest money in shares when market fluctuations could significantly reduce the value of your investment, for instance, if you now have money set aside for school fees due in three months.
Invest it in a money market instrument or a three-month fixed deposit that will guarantee the preservation of your principal and capital to achieve the goal. Imagine that you are considering going on your annual vacation. Consider making monthly contributions to a money market unit trust in such a situation, allowing you to compound your interest and guarantee capital growth.
Again, consider shares if you have a long-term outlook and like to take risks. Young people may view shares because of the possibility for capital gains and appreciation and the ability to receive dividend payments regularly. Knowing your aim can make selecting an investment to help you reach your financial objectives easier. To assist you in choosing an investment that meets your goals, you can work with a licensed investment professional.
Courtesy Desmond Bredu
The author is a member of the Chartered Institute for Securities and Investment (UK), a chartered accountant with the ACCA (UK), and a professional investor. Desmond is an advocate for financial literacy who is passionate about getting the word out, especially to young people. He is in charge of Stanbic Investment Management Services' client coverage division.
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