We currently see more options than ever when choosing where to place our funds in order to invest them, yet every such investment can be brought down to one of three main objectives : safety, income and growth – which are also the three main types of investors.
Each objective and type of investor comes with its recommended investment vehicles. While an investor can have more than one objective type, its success usually comes at the expense of the other objectives. Let us examine each objective and try to exemplify how you can use them in order to develop an investment strategy.
To start, there is no such thing as a completely safe and secure investment. We’ve seen time and time again that even the safest investment vehicles sometimes fail. In spite of this fact, there are choices that are a lot safer than others, clearly.
Usually, the most secure investments are high-quality government or corporate bonds. By high quality we understand a Finch rating of at least A+. These investments aim to preserve your capital while receiving a specified rate of return.
The safer the investment, the lower the average return or yield it brings you. If you also put into account inflation, fees and commissions, you sometimes find out that you’re earning pennies per year in interest in these safety assets, which can be quite unfulfilling for some investors.
If we’re talking about bonds, an AA bond will be slightly riskier than an AAA bond, which also translates in a higher yield. Similarly, BBB bonds are considered to carry medium risk, while also providing a higher than normal yield.
At the end of the spectrum, there are so called “junk bonds”. These junk bonds provide the highest available yield while also having the highest risk to default.
Understanding your investment limit – that takes budget planning:
- View tools: money management forms
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Most investors look for a certain degree of success in their portfolios, at least to keep up with inflation. Especially for people who want their portfolio to produce a fixed sum of money every month, a good degree of profit is necessary. Retired people fall into this category and they prove to be a very good example, because they need to extract money each month from their portfolios in order to cope with daily expenses.
People seeking long-term capital gains have different investment styles and objectives from those mentioned above. They seek larger than average yearly gains while not needing to extract money from their portfolios. Thus, they tend to favor other investment vehicles, like common stock, commodities, CFDs, etc. Of course, the risk they expose themselves to is much higher.
A secondary objective for all investors is so-called tax minimization. Many investments, especially in the U.S., come with certain tax advantages.
These are the most common investment objectives, along with their most common investment vehicles. It is very important to define your investment objectives before entering the market. These are closely linked with the gains you are expecting from these investments. You do not have to choose a single objective, just like we said in the beginning, but be careful when dividing possible risks and rewards.
People invest their money for all the right or wrong reasons. But investing for an easy retirement and investing to become a millionaire are two very different things. Learn how to choose your objectives correctly and where to look for investment vehicles in part 2 of this article.