Each new visitor to a gym typically has a particular goal in mind. It may be about improving their appearance (“sculpting their body”), becoming more flexible (to support their dancing or golfing hobby), or improving their overall health (losing fat). Personal trainers at the gym might direct new customers to certain pieces of equipment based on each one’s specific goals. Some routines will be focused on cardio, others on either overall flexibility or specific muscle strengthening.
In the same way, investors’ have different goals motivating them to set aside resources today to meet future needs. And, just as gym patrons are directed to different pieces of gym equipment that best suit their goals, investors’ portfolio picks need to be driven by their financial goals.
Investor goal #1—Capital appreciation
The goal of a capital appreciation portfolio is to produce return that exceeds the inflation rate. The idea is to build future purchasing power. The investor is focused on creating future financial “muscle.” In looking ahead to retirement, this person seeks price appreciation in individual stocks, funds, ETFs, or real estate holdings. Both the risk tolerance and time frame (years remaining until retirement) will be factors in selecting specific investments (“pieces of equipment”) for the portfolio. In the same way that different gym visitors might use the same piece of equipment, but be directed to perform a different number of “reps” on that machine, capital appreciation-focused investors might or might not choose to reinvest stock dividends or rental income, depending on whether they are seeking moderate or high portfolio growth.
Investor goal #2—Consistent income
People invest in income-producing assets for several reasons—to cover current expenses by supplementing income from work or, if they are retired, to supplement their Social Security benefit. New heirs to cash inheritances might find themselves able to reduce working hours and use their newly inherited assets to generate passive income, which then helps them transition to a less stressful lifestyle. Investors who want consistent, passive income, might choose dividend-paying stocks (or mutual funds or ETFs consisting of dividend stocks). Government and corporate bonds can also help generate passive income. REITs are real estate funds that generate dividends. The Sheaff Brock Preferred Income portfolio strategy seeks to generate income along with preserving capital.
Investor goal #3—Increasing income
Because of inflation, income investors are likely to find that the buying power of the dollar generated by their portfolios erodes over time. One portfolio choice might be bonds issued by state and local governments. Income from those municipal bonds (or funds) is exempt from federal tax. Investors who anticipate being in higher tax brackets in the future (or who anticipate rising tax rates), might choose “munis” for their portfolio. “Aristocrats” is a name given to a select group of S&P 500 stocks with a twenty-five year (or longer) history of consecutive dividend increases.
No one piece of gym equipment is “better” that the others; patrons are directed to those machines that best suit their primary goal—whether that is improved appearance, greater flexibility, or weight loss. In the same manner, investors’ portfolio picks need to be driven by their unique combination of financial goals.