When deciding to invest, the specific asset/security should meet your investment objective(s). Your investment objectives must also align with your money or financial goals.
Last week, a piece from Miriam Amissah on “Setting your Money Goals” shared tips on how to set SMART money goals. Once your money goals have been set, the next thing to do is to match your money goals to your investments.
Your investment objectives are the goals you have for your investment portfolio. They may include generating additional income, achieving capital appreciation, or preserving wealth. In simpler terms, you can invest to meet your money goals like owning a car or home, paying school fees, taking a vacation, owning a property, building an emergency fund, etc., if it aligns with the investment objective.
When determining your investment objectives, you need to ask yourself, what is your investment need? The key considerations here are:
- Is my investment for constant income? – That is regular cashflows to you to support your monthly expenses etc. For example, some bonds pay interest semi-annually, and some mutual funds and unit trusts can pay you monthly returns to help you pay for school fees or even monthly fixed expenses. Investing in or running a retail business can also provide regular cashflows to meet your expenses.
- Is my investment for capital appreciation/gains? – This is to see actual growth in your principal invested to make a big purchase like a property or a car. You may also consider a landed property with a potential appreciation of its value with time.
- Is my investment for capital preservation? – To avoid losing value because of the time value of money. The principle of the time value of money can be said that a cedi today is worth more than a cedi tomorrow- i.e., what a cedi can buy today may not be able to buy the same thing in the future. It is very important to note that these objectives are not mutually exclusive; there are instances where you can achieve more than one objective using one investment vehicle.
Answering these questions is very important as it will inform your decision relative to the type of investment you should make. For example, if you currently have money for school fees due in 3 months, it won’t be advisable to invest the funds in shares where market movements can cause a significant drop in the value of your investment. You may be better off putting it in a 3-month fixed deposit or a money market instrument that will ensure your principal/capital is preserved to meet the goal. Suppose you are looking at taking your yearly vacation. In that case, you can look at contributing monthly to a money market unit trust that will compound your interest and ensure capital appreciation.
Again, you could try shares if you have a long-term perspective and are risk-taking. Shares may be a good option for young people, especially with the potential of capital appreciation/gains and being able to get some regular income through dividend payments. Understanding your objective will help determine what investment is suitable for meeting your money goal. You can engage a licensed investment professional to help you make an investment choice that suits your goals.
By Desmond Bredu
The writer is an investment professional, a multiple paper prize award-winning chartered accountant with the ACCA (UK) and a Chartered Institute for Securities and Investment (UK) member. As a financial literacy advocate, Desmond is passionate about spreading financial literacy, especially among the youth. He heads the client coverage team at Stanbic Investment Management Services.
Email: [email protected]