Investment Objectives

Investment Objectives are expressed in Terms of Risk and Return.
Investment decision is a trade-off between return and risk tolerence. A high rate of return is typically accompanied by a higher risk. Despite the need for a high return, an investor may be uncomfortable with the risk that is attached to that higher return portfolio. As such, it is important to consider not only return, but the risk of the investor in a policy statement.

Factors Affecting Risk Tolerance
· Age– an investor may have lower risk tolerance as they get older and financial constraints are more prevalent.
· Family situation – an investor may have higher income needs if they are supporting a child in college or an elderly relative.
· Wealth and income – an investor may have a greater ability to invest in a portfolio if he or she has existing wealth or high income.
· Psychological – an investor may simply have a lower tolerance for risk based on his personality.

Note:
· risk tolerance precede any return objective.

Return objectives
· Capital preservation -minimize risk of loss, earn a return at least equal to the inflation rate
· Capital appreciation – earn a return that exceeds the inflation rate.
· Current income – refer to additional income rather than capital gain, e.g. dividend and interest income
· Total return – refer to capital gain and reinvestment of current income

Liquidity requirements
· determined by the spending needs that must be met by the portfolio
· increase -> ability to tolerate risk declines

Time Horizon
· when ages-> change time horizon->change risk tolerance

Human capital (earning potential)
· greatest when she begins her career, and then decrease

Financial capital (accumulated wealth)
· at its minimum when begins her career, increase while human resources decrease
· as investor perceives her human capital dwindling, become less & less tolerant of risk

Tax concern
· tax-exempt securities for wealthy (high tax bracket), avoid investment that produce high current income
· Younger investor’s portfolio allocated to equities & assets with high capital gains potential & little current income. As income increase, movement into tax-exempt securities
· Retirees & has little or no taxable income, can allocate 100% to income generating securities (fixed income)

Legal and regulatory
Individual portfolio
· generally not subject to nearly legal & regulatory scrutiny of typical institutional investor’s portfolio.

Institutional investor’s portfolio
· originally constructed within legal & regulatory constraints, concern changes in laws & regulation.

Unique needs and preferences