Investing objectives


The word "investing" is undoubtedly familiar to all of us. But everyone interpret it differently. There are many books on economics that give classifications of investors. There are TV channels, both in Russia and abroad, devoted to this matter.

But despite all this, investing remains for many a difficult issue, and decisions are often made by intuition, on the advice of friends, under influence of advertising. The outcomes can be different. One can remember those people who earned fortunes by investing, for example, in existing property in the 90's and those who lost everything he had by investing in "cheap" real estate under construction, which was never built. And all this is called investing.

To prevent serious moral and material consequences of investing, the best thing to do is at first define what do we want from all this. Generally, all investments can be divided into two main groups:

  • Accumulated capital protection
  • Raise of capital

Most of investing strategies are based on these two objectives. The main thing is that one must understand that the objective of accumulated capital protection supposes minimum returns and maximum safety of investments. Typically, in this case we are talking about safety in terms of responsibility of government of leading countries. Benchmark returns in this case is the refinancing rate of the central banks of these countries. The returns denominated in the currency of these countries will be the returns gained at capital protection, for which the state is responsible as the "supreme" guarantor in world. Of course, states are different, as well as currencies are. But nothing prevents one to distribute capital among various baskets of different currencies and different countries.

But when the objective is to raise capital, safety gives way to profitability, and the basic rule here is the higher the possible returns, the lower is the safety of investments. This rule has no exceptions. There are no 100% safe investments with a 100% returns per month in the most robust of the world's currencies. That is why it is important to observe the required proportion between one’s own fear and one’s own appetite - that is the fear of losing savings and appetite for profitability, which in this case is equivalent to risk appetite.

Thus, the correct defining of investing objectives - what do you want from investment: to protect or to raise capital, and if both, then in what proportions? For example:

  • 90% of capital - to protect, and 10% - to raise. This is a conservative approach. It is suitable for most investors who are not ready to loose their savings.
  • 50% of capital - to protect, and 50% - to raise. This is a balanced approach, a "happy medium" with a risk of losing half of savings. The remaining half is a kind of insurance against risk.
  • 20% of capital - to protect, and 80% - to raise. This is a risky approach, suitable only for those savings, the risk of loss of which will not have catastrophic consequences for investor.

Certainly, there are many variations between these three approaches with possibility of diversification of investments in various instruments and for various terms. For example, one invested 100% into something risky, earned 200%, now it is better to invest half of the capital in government bonds and never risk this capital again. Maybe this is called "successful life".