MoneyWatch

Athena financial & insurance services, inc.

Registered Investment Advisors
Text Box: Most analysts think 2007 will be another good year for stocks, but perhaps not as strong as last year. A 10% gain in the S&P 500 index, compared with 14% in 2006 would take the index above its record high of 1527 set in March 2000 and would probably be enough to please most investors. But before you focus on gain you have to look at investment objectives. Generally speaking, four main investment objectives cover how you accomplish most investment goals. They are: Capital growth, Capital preservation, Income and Speculation. Defining these goals is important because certain strategies and investments may work well for one goal but not another. Often an investment portfolio might employ several of these goals simultaneously. Capital growth is most concerned with long term appreciation. Generally, if this is your objective you are not concerned with the daily fluctuations of the investments you own and are content to hold them for several years. A typical strategy might be to make purchases at regular intervals (such as in a 401(k) plan or other retirement program) and to reinvest the dividends. You’re willing to take some risk for the possibility of greater returns down the road. Capital Preservation on the other hand, is more concerned with mitigating risk. This is a strategy you might associate with senior citizens with limited resources who want to make sure they don’t outlive their money. For this investor, safety rules—even to the extent of giving up return in exchange for security. Investors with a capital preservation goal tend to prefer CDs, Treasury Bills and money market accounts. If income is your objective you probably prefer stocks which pay a consistently high dividend, tax free municipal bonds or highly-rated corporate bonds. These products produce a current income on a regular basis. Many people who pursue a strategy of current income are retired and use the income for living expenses. Other people use these investments to create an income stream that never touches the principal, yet provides cash for certain expenses. Speculating is the most aggressive of the four objectives and requires the ability to stomach significant risk and potentially large losses. But it also offers the opportunity for the greatest rewards. Speculators typically own an investment for the short term and are generally interested in turning quick profits. To achieve this goal they often use sophisticated trading techniques like shorting stocks, trading on margin, or buying options. Of course, just because you know your objectives doesn’t mean you’ll know where to put your money but at least you’ll have a running start. Many capital growth investors, who have enjoyed four years of impressive stock gains might start looking to put their money into more-defensive companies, such as makers of household goods like detergent, shampoo and toothpaste. These manufacturers will do well despite the slowdown because consumer demand for these items won't fluctuate much. Income investors might focus on large, financially healthy companies with strong cash positions that typically pay dividends. 3M, General Electric and Microsoft fit the bill. Bond investors might start looking at buying short-term maturities. Why? Foreign demand for benchmark 10-year Treasuries will probably taper off in 2007 as buyers look to better returns overseas. That'll divert funds flowing into Treasuries, pushing prices down and yields up past 5% early in 2007. Also favoring short-term bonds: The Federal Reserve will start cutting interest rates about halfway through the year, which will give a boost to bond prices. But a cut in interest rates is also a positive for stocks, so 2007 could be another year where investors of many persuasions turn a profit.▲

Identifying your goals...

Volume 18, Issue 1

January 8, 2007

Defining Investment Objectives