Table of Contents
Basic Investment Objectives: An Overview
There are many options when investing your savings, but they all fall into three main categories: safety, income, and growth. As an individual investor, your first step is to find the right balance among these goals. Success in one area may mean sacrificing another.
KEY TAKEAWAYS
- Investments can be categorized based on safety, income, and money growth.
- Every investor needs to choose the right balance of these three factors. One will be more important than the others.
- Your ideal mix will vary as your life situation and needs change.
- The optimal choice is usually a blend of all three options that suits your requirements.
Safety
While no investment is completely risk-free, some come close. For example, investing in government-issued securities in stable economies, like U.S.-issued bonds, is considered very safe. You’d have to imagine the collapse of the U.S. government to lose your investment.
Another safe option is AAA-rated corporate bonds. Big, stable companies issue these and offer a reliable way to protect your investment while earning a set interest rate.
FAST FACT
The risks are similar to those of government bonds. For example, if you lose money investing in bonds from companies like IBM or Costco, they would have to go bankrupt.
The money market has very safe investment options like Treasury bills (T-bills), certificates of deposit (CDs), commercial paper, or bankers’ acceptance slips.
However, choosing safe investments means lower returns compared to riskier options. This is called “opportunity risk.” Investors opting for safety may miss out on higher potential gains.
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There’s also a risk related to interest rates to consider. For example, you might invest in a bond with a 1% return but then see inflation rise to 2%. This means your money loses value in terms of buying power. That’s why short-term investments like three-month and six-month CDs are the safest. However, they also pay the lowest interest rates.
Income
Income-focused investors may invest in similar fixed-income assets mentioned earlier, but their main goal is to generate regular income. They prioritize assets that provide a steady income stream and may be willing to take on slightly more risk to achieve this. Retirees often focus on income to ensure a stable monthly income while keeping pace with inflation.
They may include government and corporate bonds in their portfolio, and they might consider bonds beyond the safest AAA-rated options and opt for longer-term CDs. These ratings are assigned by agencies that assess the issuer’s financial stability. Bonds rated A or AA are slightly riskier but offer higher returns. BBB-rated bonds carry medium risk but provide more income.
FAST FACT
Beyond these ratings, you’re entering risky territory known as junk bonds, where the word “safety” doesn’t apply.
Income-focused investors also invest in preferred stocks or common stocks known for historically paying high dividends.
Capital Growth
Capital growth happens when you sell an asset, like stocks, for more than you paid. Aside from any dividends you receive, you have to sell stocks to make a profit.
Other assets, like diamonds or real estate, can also grow in value, but they all come with some risk. If you sell an asset for less than what you paid, it’s called a capital loss.
Stock markets offer some of the riskiest investments because their returns can be unpredictable. Blue chip stocks are considered safer because they’re from well-established companies. They might not grow quickly, but they usually pay dividends and have the potential for long-term growth.
Growth stocks are for those willing to take some risks. They’re from fast-growing companies that could become the next big thing but fail.
Dividend stocks are from stable companies that may not grow quickly but pay steady dividends year after year.
Important: Stock profits have a lower tax rate if you hold them for over a year.
Many individual investors skip picking individual stocks and instead invest in exchange-traded funds (ETFs) or mutual funds. These funds give investors a piece of many different stocks all at once.
One built-in bonus of stocks is a favorable tax rate. Profits from stock sales are taxed at the capital gains rate if the stocks are owned for at least a year, which is less than the income tax rates paid by most investors. (Rewrite in simple language that is SEO-friendly and has no plagiarism)
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Secondary Objectives
Investing has three main goals: safety, making money, and growing your initial investment. However, there are other important factors to think about, too.
Tax Minimization
Some investors think about how taxes affect their investments. For example, a well-paid executive might look for investments that help lower their taxes. Putting money into a retirement account or another tax-friendly plan can also help reduce taxes.
Liquidity
Some investments, like bonds, are easy to turn into cash fast and without much risk. Stocks are a bit harder to sell quickly, and selling them at the wrong time can mean losing a lot of money.
Other investments, like real estate or art, aren’t as easy to turn into cash fast. They can be good investments, but selling them at the wrong time can lead to losses.
FAQs
1. When Do Treasury Bills Mature?
Ans: Some investments, like bonds, are easy to turn into cash fast and without much risk. Stocks are a bit harder to sell quickly, and selling them at the wrong time can mean losing a lot of money. Other investments, like real estate or art, aren’t as easy to turn into cash fast. They can be good investments, but selling them at the wrong time can lead to losses.
2. What Is a Junk Bond?
Ans: Some investments, like bonds, are easy to turn into cash fast and without much risk. Stocks are a bit harder to sell quickly, and selling them at the wrong time can mean losing a lot of money. Other investments, like real estate or art, aren’t as easy to turn into cash fast. They can be good investments, but selling them at the wrong time can lead to losses.
3. What Are the Capital Gains Tax Rates?
Ans: Some investments, like bonds, are easy to turn into cash fast and without much risk. Stocks are a bit harder to sell quickly, and selling them at the wrong time can mean losing a lot of money. Other investments, like real estate or art, aren’t as easy to turn into cash fast. They can be good investments, but selling them at the wrong time can lead to losses.
The Bottom Line
For most investors, it’s not about choosing between safety, growth, or capital gains. Instead, it’s about finding a balance that fits your needs, and this balance can change over time. When you’re starting your career, you might be more willing to take risks for higher gains. But as you near retirement, you’ll likely prioritize protecting your savings and reducing risk.
Your investment mix will mainly focus on one goal at a time, while other goals play a smaller role. It’s all about finding the right balance for your stage in life.
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