The past few weeks, my Short & Simple Investing Lesson has been about investment objectives, which is a complicated sounding term for the main reason you buy an investment. The first question you ask when looking to invest your money, whether in a new pair of shoes or an investment fund, is what outcome you want from your investment. Just as the shoes can provide either heels for a cocktail party or comfortable work shoes, the investment can provide income, potential for an increase in value, emergency funds, or a combination of these.
Over the past few blog posts we have looked at these investment objectives:
- Capital Preservation-being there when you want it
- Capital Appreciation-increasing in value
- Income-paying out money during ownership
Today we’ll look at combining objectives. We all want the best of everything, so naturally we ask why we can’t get more than one of these major objectives from an investment. As a general rule, if you are focusing on one objective, then you will sacrifice a little of the return toward that objective when you throw in a second objective.
This is much like the search for the perfect little black dress that we want to serve two purposes; we want to be able to wear to it work but we also want to wear it to cocktail parties. If it is too formal, then we won’t be able to dress it down, but if it is too causal, then we won’t be able to dress it up, however, some dresses will meet both objectives. If we focus on one objective more than the other, we sacrifice the goal of it providing the perfect outfit for each type of occasion. The good news is that like the little black dress, there are definitely investments that both increase in value, and provide income at the same time, particularly when an investor considers the overall price trend of an investment class before buying and selling it.
Some types of investments that are known to pay out decent income are high yield bonds, real estate trusts, and oil and gas trusts. These investments normally pay out the highest income during riskier times, because they have to make higher payouts to attract investors for higher risks. This also typically coincides with the low end of the price range for that particular type of investment. When an investor buys such an asset at the low end of the price range, she will receive capital appreciation once the investment increases in value back to more normal valuations. In the meantime, she will receive the income from that investment, so it is meeting two objectives.
Once again, investment objectives are like most other things in our lives; we begin our search with the outcome we want. Begin with first knowing the main thing that you want from an investment; for it to be there when you want it, grow in value or pay out income. Understanding and considering investment objectives is one of the first steps toward successful investing that every financial woman takes.