INVESTMENT management is about trying to achieve financial objectives while staying within the constraints of funds available to you; in simple terms, investment management is putting your money to work.

We have all been told once in our lives that the only way to make money is to get a job and work, and as such that is what most of us do. Unfortunately, there is a limit to how much we can work and how much money can be made from working. Putting your money to work maximises your earning potential whether or not you work overtime, receive a raise, or seek a higher-paying job.

It has been proven that behind every successful portfolio there is a written, measurable and repeatable investment strategy. The proper strategy will lead to more consistent investment performance and help to mitigate against emotional investment decisions. In the words of the late Dr W Edwards, “If you can’t describe what you are doing as a process, you don’t know what you are doing.”

In preparation for your portfolio, it is important to define who you are as an investor. Typically, investors are classified in four categories: individualist, adventurer, celebrity and guardians. These categories are further assigned to two dimensions, namely, confident/anxious and careful/impetuous. The dimensions speak to the time an investor takes to make a decision as well as their assurance in the decision made. The individualist is seen as careful and confident; the adventurer is seen as confident and impetuous; the celebrity is seen as impetuous and anxious; and the guardian is seen as anxious and careful.

After defining who you are as an investor, the next step is to decide on the portfolio objectives; that is, your expectations from your portfolio. You may have financial goals such as being able to finance a luxury retirement or afford a second home. It is your objectives that help you to reach those financial goals. Goals without objectives can never be accomplished while objectives without goals will never get you where you want to be. Goals are the results; objectives are the path that gets you to your results. To fulfil any investment objective, investors should first evaluate their risk appetite. While some investors are satisfied by investing in a low-risk: low-return scheme, others are willing to endure short-term loss for potential gains in the long-term. Traditional portfolio objectives are stability of principal, income objective, growth of income and capital appreciation.

It is believed that there is no such thing as a completely safe and secure investment. Yet, we can get close to safety for our investment funds through stability of principal, which emphasises on preserving the original value of the fund. In preserving the original value of the fund, the purchase of certificate of deposits and other money market investments such as government-issued securities in stable economic systems are appropriate.

With the income objective, some temporary decline in principal value is allowed as the principal is invested in income-generating assets

such as dividend/preferred stocks and bonds. With this objective, investors must inevitably sacrifice a degree of safety if they want to increase their yields. There is an inverse relationship between safety and yield: as yield increases, safety generally goes down and vice versa.

Customarily, growth of income has an approach which generates increasing income over time, within the risk parameters of the investment policy statement set out by the investor.

A capital appreciation objective means the investment is in assets which will grow in value. This objective is most closely associated with the purchase of common stock, which offer low dividend yields but great opportunity for increase in value/capital appreciation. Common stock generally ranks among the most variable of investments as their return likely depends on what will happen in an unpredictable future.

In addition to these objectives, there are other portfolio issues that must be considered. Your liquidity requirements must be taken into account when constructing the portfolio, that is, how easily one’s investments can be converted into cash. The time horizon is also crucial. The portfolio of someone who needs the money in six months is very different from a 10-year investment window

With these objectives in mind, the advantages of one often come at the expense of the benefits of another. For instance, if an investor is pursuing growth, he or she would likely sacrifice some income or safety. With this axiom, most portfolios will be guided by one predominant objective, with all other potential objectives occupying less significant weight in the overall scheme.

Choosing a strategic objective will depend on various factors such as the investor’s temperament, their stage of life, marital status, family situation, etc. One only needs to allocate the right amount of time and effort in finding and deciding on opportunities that match your objectives.

Shadae Whyte is an accounts payables officer at Stocks & Securities Ltd.