How to Measure Investment Success


Volume 92 No. 12 - December 2021


12-2021 Newsletter
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“If you don’t know where you want to go, how are you going to get there?” This adage can be applied to many aspects of life, including investments.


When are you successful? The answer depends on what you set out to do, and to a similar extent, whether that original intention was the right one for you. The word ‘success’ is a relative term – perhaps even more so when it gets applied to investments.


Indeed, every investor must have a goal, but that goal must make sense. Beyond learning the basics of how investments and the economy work, and making some decisions about your risk tolerance, it is also important to determine what you want to accomplish as an investor.


Determining investment objectives starts with establishing financial goals. Defining what is an investment objective and using common financial goals as a reference can help in determining what is appropriate for your specific set of circumstances.

Investment Objectives and the Factors that Define Them

Investment objectives represent the goals investors set for their portfolios. These objectives help evaluate progress toward those goals and help investment managers form the strategies that will help you achieve your goals. Many factors influence how people form their investment objectives, which vary in scope and nature.


Before investment objectives can be determined, the goal and future purpose for the money being invested must first be established. Some common goals are retirement saving or spending, college saving, philanthropic giving, or a big purchase like a boat, automobile, or second house. In addition to the previously mentioned benefit of aiding investment managers in crafting an appropriate strategy, identifying a goal for your investments will give purpose and framework to the investing journey.


Once goals have been established, an appropriate investment objective can be identified. Investment objectives include a few key things: how long the money will remain invested (often referred to as “time horizon”), the risk an investor is willing to take on (often referred to as “risk tolerance”), the previous knowledge and preferences a person has, and personal net worth and income. These factors are used to determine the most appropriate objective. A typical conservative and risk-averse objective is Income, while a more aggressive objective is Growth/Aggressive Growth. Many investors choose an objective that is somewhere between these two.


Here are a few common investment objectives:


Income

Investors with an overall income objective seek to generate income from their portfolios, oftentimes in the form of stock dividends and/or bond coupon payments. Portfolios with this objective will have a much higher allocation of fixed income securities compared to equity securities. This strategy is appropriate for investors who have a more short-term need or desire for income from their portfolio. Oftentimes this objective is associated with an investor who has a low risk tolerance.


Income and Growth

The income and growth investment objective pursues income as its main objective, similar to the income objective, but also seeks to achieve some growth through capital appreciation. This capital appreciation component will generally lead to a higher allocation of stocks than the income objective.


Growth and Income

Growth and income investors seek both current income and capital growth. In contrast to investors who prioritize income, growth and income investors’ main objective is capital appreciation, with income as a secondary objective. Portfolios with this objective will likely have a higher allocation of equities compared to fixed income securities, and consequently, higher risk and volatility.


Growth/Aggressive Growth

A growth objective prioritizes long-term capital appreciation. This objective will likely have a higher equity allocation compared to the previous three objectives, as well as higher volatility and increased risk. In exchange for this increased risk, investors with a growth objective hope to generate higher returns over time. Returns are more likely to vary from year to year. This strategy is most appropriate for investors with a long time horizon.


Application of Investment Objectives

Once the framework for your investments has been put into place, evaluation of progress toward your goals can now be properly measured over time. Just as objectives vary, so too will the methods and metrics used to evaluate progress and success. It is important to discuss progress toward your goals with your investment manager on a periodic basis. Investment success will be measured differently for each investor and will be determined by each person’s unique set of goals and circumstances.


Investment objectives, like goals, can evolve over time. Consequently, an objective or goal that is appropriate for someone at age 25 might no longer be appropriate at age 40 or 50. Circumstances change, and your investment goals and objectives should too.


We have been honored to help generations of investors pursue investment success by establishing meaningful and relevant investment objectives and goals. If you have had a change in your investment goals or would like to have an updated discussion about your finances, we would be glad to help you review your objectives and ensure that they are in line with your investment portfolio and strategy.

 

Investment Counsel Inc., a Division of LaFleur & Godfrey, is a registered investment adviser. Information presented is for educational purposes only. It should not be considered specific investment advice, does not take into consideration your specific situation, and does not intend to make an offer or solicitation for the sale or purchase of any securities or investment strategies. Investments involve risk and are not guaranteed. Be sure to consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein.