Market Musings 08/08/21:

Defining Investment Goals, and the value of patience

During the dog days of summer when financial markets tend to drift, we all have an opportunity to reflect on our personal longer-term principles and objectives. After all, we all have differing financial situations, requirements, potential tax liabilities, risk tolerances and investment horizons, which then should be taken into consideration with respect to our portfolio setups.

Defining Investment Goals

This sounds obvious, right? Use my existing pot of money to make more money…

The reality for anyone who has stopped to consider this subject for a few moments, is that it can be anything but obvious.

  1. Investment Horizon: let’s start with the obvious - someone who starts investing young, has in principle a long investment horizon. But this is not necessarily true, if for instance, they are saving up a deposit to buy their first house or flat. They may in reality need to cash in part or all of their investments sooner rather than later, in actual fact.

    Similarly, one might assume that an investor who is already retired will want a steady stream of income, and is averse to taking much risk of investing for the long-term. But again, this may not actually be true, if for instance, this retiree already has sufficient pension income from a state pension plus other private pensions or other investments such as buy-to-let property. In this case, they may in reality have a long-term investment horizon for at least part of their investment portfolio, as they may be intending to eventually pass this investment capital on to their beneficiaries.
  2. Risk Tolerance: risk tolerance is partly a function of investment objectives and time horizon, but also of psychology. It is all very well telling a young investor that they should be able to invest for the long-term, and thus be able to take a high level of investment risk in their portfolio.

    But in reality, this may be true objectively, but what if the young investor is simply not comfortable with the ups and downs of a risky portfolio? One’s risk tolerance should be matched to our personal ability to cope with volatility. Ultimately, sleeping well at night is key! One of the biggest mistakes that retail investors typically make is taking too much risk in their portfolios. This is something that is easy to do when stock…

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