Portfolio Objectives

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To the uninitiated, an investment portfolio's objectives may seem obvious: to make money. But specific strategies exist within the overall objective of increasing wealth. Understanding these objectives -- and how they change at different times in your life – can help you attain financial stability.

Accumulation

  • Nearly all investment portfolios take actions today that will provide greater financial freedom in the future. That usually means save now, invest now and spend later. During our working lives, the primary objective is accumulation. Accumulation occurs in two ways: to have money to invest, we must set it aside -- allocated from money we might spend; and once we invest, our capital appreciates when the market value of our investments increases. During the accumulation stage, the objective is generally to forgo investments that may produce income by dividends, in favor of investments most likely to appreciate in value, thus maximizing wealth accumulation.

Distribution

  • Distribution -- which usually begins upon retirement -- is the point at which we begin to regularly withdraw and spend money in an investment portfolio. Consider inflation estimates and determine how much money you want and need at retirement. Based on the answer, you'll create objectives to accumulate enough money, at a given return, over an allotted period to produce the desired income. Some portfolio objectives may try to preserve the portfolio's principal and only spend portfolio-produced income. Others include plans to draw down the principal. In either case, objectives usually invoke a change from chosen investments -- because they are likely to appreciate in value -- to investments that produce income by dividends or bond payments.

Tax Planning

  • Different investments have varied tax treatments. For example, municipal bonds are treated differently than corporate bonds. Investment vehicles such as IRAs and Roth IRAs, and regular stock accounts, are each handled differently by the Internal Revenue Code. There are several major tax considerations in investment portfolios; three of them deal with timing and whether you pay taxes on income before you invest it, pay taxes on income from the sale of the investment, or both. Deferring taxes until later allows you to accumulate more money faster. Paying taxes first, however, allows you to reap the investments' returns without paying taxes later. Some investments are tax exempt, though the trade-off for tax exemption is usually a low yield.

Preservation of Capital

  • A sometimes-overlooked objective of investing is simply not losing your money. Markets ebb and flow. We cannot predict them accurately, but we know they operate cyclically. Planning for recessions or other market anomalies is ideal. Think of it as a "fallback" or defensive position, in which your primary goal is not losing your principal. A fallback position may involve selling securities and moving to investments considered safer, like Treasury bills.

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