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How can I set objectives?

This guide looks at how investors can analyse their investment goals and objectives and align them with appropriate investment strategies.

The first step to deciding what to invest in is setting your objectives. Being clear from the start what you are trying to achieve should help you tailor your investments to your personal circumstances.

ALT_TAGThere is no one right set of investments for you, but there are certainly many wrong ways to put a portfolio together given your situation and aims.

Your objective should take into account the what – the amount of money you need and its purpose – and the when – when you need the money and how long it must last.

However, probably the most important factor to consider is the level of risk you are prepared to take on.

Risk is often measured in the investment industry using volatility. This measures the dispersion of returns around the mean: essentially how much they move around their average.

This isn’t necessarily what you or I would perceive as risk when running our own investments. We are more likely to be concerned with whether or not we are losing money, whether or not we are beating inflation, and whether or not we are on track for our goals.

Volatility can help us understand how likely a fund’s value is to fluctuate, but you need to take into account the other questions when putting together a portfolio.

You need to consider how likely the fund is to beat inflation – a fund could have low volatility but little chance of making 2 per cent per annum, which would ultimately result in you losing money in the current climate.

Performance of sectors over 10yrs


Source: FE Analytics

You also need to consider the potential for the fund to make money in the longer term. You will have to take more risk to get bigger gains, and this means your portfolio is probably going to vary a lot in value during its life.

In asking yourself what your attitude to risk is, you need to decide how you would react if your portfolio lost money; this is a highly personal question that depends on your individual emotional make-up.

What if you don’t see the gains you were hoping for? What if you actually see your portfolio lose value?

If you think you would react badly to losses and feel inclined to shift everything into very low-risk assets, you could end up with the worst of both worlds: a fall in the value of your portfolio and a set of funds that are likely to take a long time to even make those losses back.

Being realistic and honest is the key: it is easy to be blasé about losses before you first start seeing the real pounds and pence you have won with your hard work slip away from you as a market falls.

It may be that you have a number of different objectives and are prepared to tolerate different levels of risk with the funds set aside for each.

Once you have worked out the risk you are prepared to take, look at your objectives again.

If you aren’t prepared to take the amount of risk necessary to give you a chance of making enough money to reach your objectives, you need to revisit your aims and rethink them.

The other variable you have is time. With more time you have the potential for better returns with a lower level of risk.

On the other hand, if the time you want to draw down the investment is near, you may want to reduce the risk in your portfolio, even if this is likely to leave you with less than you want.

This could be preferable to leaving open the possibility of suffering big losses at the last moment.

Each factor affects the other, which means you have to think through the possibilities.

Ultimately, you can’t define your objectives independently of considering your attitude to risk, which means taking into consideration the assets and funds that are available and how you are likely to react to their behaviour.

In a previous guide, we looked at asset allocation, which is key to setting up a portfolio with a certain level of risk.

When should I switch funds?

One problem many investors have is over-trading. In setting up a portfolio, you want to choose a series of funds that should give you the returns you need over the longer term.

There will be times when each fund underperforms against your expectation and risks, and times when they outperform.

It is important not to remove a fund simply because it does badly for a year or two. You need to understand why the fund is underperforming first.

If you have chosen a fund expecting it to follow a certain strategy and it is sticking to it but the strategy is out of favour, this is not a reason to drop the fund.

Potentially, you could end up selling it just as it starts to come into favour again, and buy something that is going out of favour.

Timing the market – guessing what is going to do well or badly – is extremely difficult, even for the professionals, and especially for someone managing their own money with a job and a life on the side.

What you need to worry about is when a manager changes their style and starts investing differently. At this point you need to ask yourself if it’s the right thing to have in your portfolio or if you need a replacement.

This means that you need to keep an eye on more than just the performance tables.

FE Trustnet’s editorial side flags up issues we see with trends in the industry that it is important to be aware of, while a fund’s monthly factsheet gives investors the manager’s view on what they are doing.

Beyond this, it is also important to keep an eye on trends in the markets. In setting up your asset allocation, the idea is that you are setting yourself up for the long-term, but things can change.

Particularly in the recent economic climate, it’s important to keep on top of the general big picture with bonds and equities and review whether your portfolio’s returns meet your objectives.

Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.

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